Tamagni v. Tax Appeals Tribunal, 91 N.Y.2d 530

Lead Opinion

OPINION OF THE COURT

Wesley, J.

Petitioners, John and Janet Tamagni, contend that the New York State resident income tax (Tax Law art 22) violates the dormant Commerce Clause (US Const, art I, § 8) as applied to statutory residents of this State who claim another State as their domicile. Petitioners argue that, because New York gives no credit for resident income taxes paid to other States on investment income from intangible personal property, such as interest and stock dividends (so-called “intangible income”),¹ it potentially subjects them to double taxation in violation of the Supreme Court’s “internal consistency” test (see, Container Corp. v Franchise Tax Bd., 463 US 159). In our view, the statute does not substantially affect interstate commerce and, therefore, the protections of the dormant Commerce Clause are not applicable. Even assuming arguendo that the Commerce Clause is implicated, the tax does not violate the dormant Commerce Clause because the tax does not facially discriminate against interstate commerce, and States have traditionally retained broad powers to tax their own residents.

I.

The Tamagnis are New Jersey domiciliaries, having resided at their current address in Summit, New Jersey, from 1979 through and including the tax years at issue — 1987, 1988 and 1989. Mr. Tamagni is an investment banker with the firm of hazard Freres. His office is in New York City; however, his work often requires him to travel throughout the country. The Tamagnis own and maintain an apartment in New York City, in addition to homes in New Jersey and New Hampshire. For each of the years at issue, petitioners filed nonresident income tax returns in New York. After a field audit, the New York State Department of Taxation and Finance concluded that the Tamagnis were statutory residents of New York because (1) Mr. Tamagni had not demonstrated that he spent fewer than 184 days in New York City and New York State, and (2) the couple maintained a permanent place of abode in New York (Tax Law § 605 [b] [1] [B]).² As a result, all of their income was subject to the State income tax.³ The Department issued a Notice of Deficiency indicating that the Tamagnis owed an additional $192,541.22 in State and City income taxes, plus penalties and interest.

The Tamagnis petitioned the Department for a redetermination of the deficiency, asserting that they were not New York residents for any of the periods at issue. After a hearing, an Administrative Law Judge (ALJ) concluded that petitioners had not established that they had spent fewer than 184 days in New York State for tax years 1988 and 1989, and in New York City for 1988.⁴ Thus, the ALJ concluded that the Tamagnis were properly assessed as statutory residents for those periods only. The Tamagnis also challenged the constitutionality of the tax as applied to them. The ALJ viewed this as a facial challenge to the constitutionality of Tax Law § 620 (a) and concluded that he was without administrative jurisdiction to entertain such a facial challenge.

On appeal to the Tax Appeals Tribunal, the Tamagnis again argued that, as applied to them, the New York State definition of residence for income tax purposes discriminates against interstate commerce in violation of the dormant Commerce Clause, in that it subjects them to potential multiple taxation of intangible income. The Tribunal addressed this argument on the merits and rejected it. The Tribunal concluded that the taxpayers had not shown how they were engaged in interstate commerce simply by being domiciled in New Jersey while also being statutory residents of New York. Thus, the Tribunal concluded that the Commerce Clause was not applicable.

The Tamagnis then commenced a CPLR article 78 proceeding challenging the Tribunal’s determination, arguing that the residency tax violates the dormant Commerce Clause both facially and as applied to them.⁵ After partially converting the proceeding to a declaratory judgment action, the Appellate Division confirmed the determination, concluding that the Commerce Clause was not implicated by the imposition of the tax, because neither commuting from New Jersey to New York to work, nor maintaining a permanent residence in New York, produced “the requisite effect on commerce” (230 AD2d 417, 420). Petitioners appealed as of right on constitutional grounds, and we now affirm.

II.

Under Tax Law § 605 (b) (1) (B), any person who maintains a permanent place of abode in this State, and spends in excess of 183 days here, is deemed a resident for State income tax purposes.⁶ This classification is significant because, while nonresidents are taxed only upon their New York source income (Tax Law § 631), residents are taxed upon their worldwide, income (Tax Law § 612).

Defining residency for income tax purposes is not a new problem. The current statute can be traced back to chapter 425 of the Laws of 1922, which first defined residence for tax purposes in terms of maintenance of a permanent place of abode in New York and presence in this State for seven months (see, Tax Law former § 350 [7]). At the time the statute was enacted the Income Tax Bureau noted in its memorandum in support of the legislation that, “[w]e have several cases of multimillionaires who actually maintain homes in New York and spend ten months of every year in those homes * * * but they * * * claim to be nonresidents” (Bill Jacket, L 1922, ch 425). The statutory residence provision serves the important function of taxing those “who, while really and [for] all intents and purposes [are] residents of the state, have maintained a voting residence elsewhere and insist on paying taxes to us as nonresidents” (id.). In short, the statute is intended to discourage tax evasion by New York residents. Indeed, the Tax Department’s memorandum in support of the 1954 amendment to the statute, which established the “more than one hundred eighty-three days” requirement, specifically states that the amendment was necessary to deal with “many cases of avoidance and * * * evasion” of income tax by New York residents (see, Mem of Dept of Taxation and Finance, 1954 NY Legis Ann, at 296).

The vast majority of States join New York in utilizing definitions of residency for income tax purposes that include another category of taxpayers in addition to domiciliaries.⁷ In fact, by requiring both a permanent place of abode in this State, and presence for more than half of the year, New York’s definition of “resident” is far less expansive than some. For example, Iowa, Louisiana and Maryland define residents to include people who maintain a permanent place of abode within the State, regardless of the amount of time actually spent within the State (see, Iowa Code § 422.4 [15]; La Rev Stat Annot 47:31 [1]; Md Code Annot, Tax-Gen § 10-101 [h]).

While residents are generally subject to income tax based upon their worldwide income, New York does provide a tax credit for income taxes paid by its residents to other States. In order to qualify for this credit, the tax imposed by the other State must be on income “derived therefrom” — i.e., earned in the other State (Tax Law § 620 [a]). As the accompanying regulations recognize, this provision protects residents actually engaged in interstate commerce from double taxation by ensuring that they are taxed only once upon income derived from interstate activities (see, 20 NYCRR 120.1 [a] [2]; 120.4 [d] [“the resident credit against ordinary tax is allowable for income tax imposed by another jurisdiction upon compensation for personal services performed in the other jurisdiction, income from a business, trade or profession carried on in the other jurisdiction, and income from real or tangible personal property situated in the other jurisdiction”]).

The credit is not generally available for intangible income because that income has no identifiable situs. Intangible income generally is not derived, at least directly, from the taxpayer’s efforts in any jurisdiction outside of New York, and cannot be traced to any jurisdiction outside New York. It is simply investment income, and under the long-recognized doctrine of mobilia sequuntur personam ([“(m)ovables follow the * * * person”] Black’s Law Dictionary 905 [5th ed 1979]), it is subject to taxation by New York as the State of residence (see, Maguire v Trefry, 253 US 12,16). However, where the taxpayer can show that intangible income is in fact derived from the taxpayer’s activities in a State other than New York, the taxpayer is entitled to the credit (20 NYCRR 120.4 [d] [credit allowed where the income is derived “from property employed in a business, trade or profession carried on in” another State]).

The Tamagnis do not challenge their status as New York residents nor do they claim that the Tax Law § 605 (b) (1) (B) definition of resident violates the Due Process Clause. They challenge the statute only on the ground that it subjects them to potential double taxation of their intangible income, because New York does not grant a credit for taxes on such income paid to other States.

The taxpayers assert that the Appellate Division applied an overly restrictive definition of interstate commerce in conclud ing that the protections afforded by the dormant Commerce Clause do not apply here. As they correctly note, “ ‘[t]he definition of “commerce” is the same when relied on to strike down or restrict state legislation [under the dormant Commerce Clause] as when relied on to support some exertion of federal control or regulation’ ” (Camps Newfound / Owatonna v Town of Harrison, 520 US 564, 574, quoting Hughes v Oklahoma, 441 US 322, 326, n 2). Thus, if the tax at issue “substantially affects” interstate commerce (see, United States v Lopez, 514 US 549, 559) such that Congressional legislation limiting the State taxing power would be a valid exercise of its Commerce Clause powers, then the Commerce Clause is implicated.

Prior to Lopez (supra), the Supreme Court’s post New Deal Commerce Clause jurisprudence had expanded, almost without limit, the scope of activities deemed to affect interstate commerce. In Wickard v Filburn (317 US 111), for example, the Court upheld the application of the Agricultural Adjustment Act of 1938 to a farmer growing wheat for his own personal consumption. While Wickard may represent “the most far reaching example of Commerce Clause authority over intrastate activity” (United States v Lopez, supra, 514 US, at 560), the Supreme Court has shown little inclination to limit Congress’ powers as delineated by the Commerce Clause. Indeed, since Labor Bd. v Jones & Laughlin (301 US 1), the Court has upheld virtually all Federal enactments against challenges that they exceeded Congressional authority under the Commerce Clause. Of two notable exceptions in which the Court struck down Congressional legislation as exceeding its Commerce Clause authority (see, United States v Lopez, supra; National League of Cities v Usery, 426 US 833), one, Usery, was overruled nine years later (see, Garcia v San Antonio Metro. Tr. Auth., 469 US 528).

Nevertheless, as difficult as it may be to discern the outer boundary of Congressional power under the Commerce Clause, the Supreme Court has from time to time reiterated that such a boundary does exist. In Maryland v Wirtz (392 US 183, 196, overruled on other grounds National League of Cities v Usery, supra, overruled by Garcia v San Antonio Metro. Tr. Auth., supra) the Court stated that “the power to regulate commerce, though broad indeed, has limits” and that Courts have “ample power” to enforce those limits. The Court went on to point out that nowhere “has the Court declared that Congress may use a relatively trivial impact on commerce as an excuse for broad general regulation of state or private activities” (id,., at 197, n 27). More recently, in United States v Lopez (supra), the Court struck down the Federal Gun-Free School Zones Act (18 USC § 922 [q]) as exceeding Congressional Commerce Clause authority. In doing so, the Court emphasized that Congressional authority to enact legislation regulating intrastate activities which “substantially affect” commerce is limited to economic activities (United States v Lopez, supra, 514 US, at 556).

Significantly, the Lopez Court also pointed to the lack of legislative findings to support the Congressional assertion of interstate commerce power (United States v Lopez, supra, 514 US, at 562-563). Similarly, in this case, the Tamagnis have not shown any demonstrable impact on an identifiable interstate market which would warrant the conclusion that this tax substantially affects interstate commerce.

The New York income tax is based upon a taxpayer’s resident status, without regard to any specific commercial or economic transaction or activity. While the dissent points to the fact that Mr. Tamagni is engaged in interstate commerce in that he commutes daily from New Jersey, works as an investment banker in New York, and is involved in numerous economic activities while in New York, the income tax is imposed without regard to his commute, or the specific nature of his activities in this State. It is imposed solely based upon his presence and maintenance of a permanent place of abode in New York, without regard to any economic activities incidental to his presence here. Indeed, the fact that commuters who do not own or lease property in New York are not subject to this tax demonstrates that the tax is completely indifferent to the interstate activities which the Tamagnis claim, in conclusory fashion, are affected. Thus, in our view, the interstate Commerce Clause is not implicated by the New York income tax.

Despite our conclusion that the Commerce Clause has no application to the statute at issue, we will proceed under the assumption that Congressional legislation limiting the State’s ability to tax nondomiciliary residents would be upheld given the expansive scope of the Supreme Court’s Commerce Clause jurisprudence (see, Moore, State and Local Taxation: When Will Congress Intervene?, 23 J Legis 171; Note, “Resident” Taxpayers: Internal Consistency, Due Process, and State Income Taxation, 91 Colum L Rev 119).

Even if Congressional power is assumed, this is far from determinative. Indeed, while it does dictate some level of dormant Commerce Clause scrutiny, it does not dictate the degree or method of that scrutiny. While the definition of commerce is the same whether the question is Congressional authority or limitation of a State’s ability to legislate under the Commerce Clause, the validity of State legislation in the absence of Congressional action is ultimately an entirely different question than what subjects are within the reach of Congressional power (see, United States v Lopez, supra, 514 US, at 568-569 [Kennedy, J., concurring]). It is to this question — the validity of the State statute in the absence of Congressional action — that we now turn.

III.

The Commerce Clause provides that “[t]he Congress shall have Power * * * [t]o regulate Commerce * * * among the several States” (US Const, art I, § 8, cl [3]). On its face, the Clause is simply an affirmative grant of power to Congress, imposing no freestanding limitation on State power. Nonetheless, the Clause has long been read to contain, in addition to the affirmative grant of Federal power, a limitation upon State legislation as well. However, as previously noted, the two are not coextensive. That Congress has the power to regulate whatever may “substantially affect” interstate commerce does not mean that the States are without power to regulate in a manner which affects interstate commerce. Rather, in keeping with the original intent of the Commerce Clause to prevent the type of “economic Balkanization” which characterized the early Confederation (Hughes v Oklahoma, supra, 441 US, at 325) the negative, or dormant, Clause invalidates only State measures which “unjustifiably * * * discriminate against or burden the interstate flow of articles of commerce” (Oregon Waste Sys. v Department of Envtl. Quality of Ore., 511 US 93, 98).

Thus, “the first step in analyzing any law subject to judicial scrutiny under the negative Commerce Clause is to determine whether it ‘regulates evenhandedly with only “incidental” effects on interstate commerce, or discriminates against interstate commerce’ * * *. As we use the term here, ‘discrimination’ simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter” (id., at 99, quoting Hughes v Oklahoma, supra, 441 US, at 336). If there is no differential treatment of identifiable, similarly situated in-State and out-of-State interests, there is no dormant Commerce Clause violation.

There is little guidance in Supreme Court opinions as to how to resolve this threshold inquiry. As the Supreme Court recently noted in General Motors Corp. v Tracy (519 US 278, 299), this initial inquiry “has more often than not itself remained dormant in this Court’s opinions on state discrimination subject to review under the dormant Commerce Clause.” One principle that must be kept in mind, however, is that “[t]he dormant Commerce Clause protects markets and participants in markets, not taxpayers as such” (supra, 519 US, at 300).

Thus, contrary to the dissent’s contention, the first step in the dormant Commerce Clause inquiry is not simply to apply the so-called Complete Auto test (Complete Auto Tr. v Brady, 430 US 274), including its “internal consistency” requirement (Container Corp. v Franchise Tax Bd., supra).⁸ Rather, the first step is to identify the interstate market that is being subjected to discriminatory or unduly burdensome taxation.⁹ This requires, at the outset, identification of the similarly situated in-State and out-of-State interests which the tax treats differently. In “the absence of actual or prospective competition between the supposedly favored and disfavored entities in a single market there can be no local preference, whether by express discrimination against interstate commerce or undue burden upon it, to which the dormant Commerce Clause may apply” (General Motors Corp. v Tracy, supra, 519 US, at 300). Because the tax at issue does not operate to the disadvantage of any identifiable interstate market, but rather simply taxes residents based on their status as residents, it does not violate the dormant Commerce Clause. The fact that it may have “incidental effects” on interstate commerce is not sufficient to prove a violation of the dormant Commerce Clause (Oregon Waste Sys. v Department of Envtl. Quality of Ore., supra, 511 US, at 99; see also, Fulton Corp. v Faulkner, 516 US 325, 331).

The Tamagnis claim that the tax is discriminatory because it subjects statutory residents to potential double taxation which New York domiciliaries residing solely in New York do not face. However, statutory residents domiciled in another State are not similarly situated to New York domiciliaries. The former enjoy the privileges and protections of another State, and may therefore be subject to taxation by that State, which the latter do not. Moreover, regardless of the effects of the tax visá-vis different classes of taxpayers, the Tamagnis can identify no interstate market which is significantly impacted by the allegedly discriminatory tax.

The Tamagnis also claim that interstate commerce is affected here because Mr. Tamagni commutes to work in New York, thus implicating the interstate labor market, and because the tax is imposed based in part upon the purchase or lease of New York property by an out-of-State resident. However, the potential double taxation of which the Tamagnis complain bears no relation to either activity. The tax is not assessed against the interstate labor market per se; indeed, it is based solely upon the taxpayer’s presence in New York. The potential effects of the tax on the interstate labor market (no actual effects have been demonstrated) are incidental at best.

The fact that nondomiciliaries who commute to New York and own or lease property here are potentially subject to the resident income tax, while nondomiciliaries who do not own or lease property in New York are not, does not support any claim of discrimination or undue burden upon interstate commerce since the basis for the imposition of the tax as it relates to these classes of taxpayers (i.e., maintenance of a permanent place of abode in New York) “does not give rise to conflicting regulation of any [interstate] transaction or result in malapportionment of any tax” on an interstate activity (General Motors Corp. v Tracy, supra, 519 US, at 299, n 12). The purpose of the apportionment requirement is to assure that interstate activities are not improperly burdened by multiple taxation (id). The possible effect, if any (and again no actual effect has been shown) on the New York real estate market represents a quintessentially local, rather than interstate, concern. Thus, because the potential double taxation does not fall on any identifiable interstate market, it does not favor intrastate commerce over interstate commerce in a manner violative of the dormant Commerce Clause.

The lack of any discrimination against an interstate market here may perhaps best be shown by comparison to an example of an intangible income tax which was held to be discriminatory. In Fulton Corp. v Faulkner (supra), the Court considered the validity of a North Carolina personal income tax on intangibles. The tax was assessed against the intangible income received by individuals at a rate inversely proportional to the underlying corporation’s liability for North Carolina franchise taxes. This had the effect of taxing dividends from inState corporations less than dividends from out-of-State corporations.¹⁰ The effect on an interstate market in such a case is obvious, and is more than incidental. In this case, by contrast, there is no similar differential treatment of intrastate and interstate commercial interests. Indeed, this tax on its face does not apply to any interstate market whatsoever; it is a tax on residents based on their status as residents. There is simply no similarly situated out-of-State interest to compare to an in-State resident for purposes of applying a dormant Commerce Clause analysis. The Tamagnis were taxed for being New York residents and not for their interstate activities.

Even if the Complete Auto test were implicated here, as the dissent contends, it would not alter our conclusion that the tax at issue is constitutional. Petitioners argue, and the dissent agrees, that the tax violates the Complete Auto test because it is not “ ‘internally consistent’ ” (dissenting opn, at 548 [citing Container Corp. v Franchise Tax Bd., 463 US 159, 169, supra; Goldberg v Sweet, 488 US 252, 261]). The internal consistency test is not a freestanding constitutional requirement, but is merely a tool for assessing the fair apportionment and nondiscrimination prongs of the Complete Auto test. It comes into play when the same interstate activity crosses State lines and is subject to tax in more than one State (see, Goldberg v Sweet, supra, at 261).

The fair apportionment requirement of Complete Auto (supra), however, is not violated when the incidences of the tax fall on a separable local occurrence as opposed to an interstate activity, even where the local occurrence is part of a greater continuum that makes up an interstate transaction (see, Oklahoma Tax Commn. v Jefferson Lines, 514 US 175, 187-188 [“the Commerce Clause does not forbid the actual assessment of a succession of taxes by different States on distinct events as the same tangible object flows along”]). In Oklahoma Tax Commn. v Jefferson Lines, the Supreme Court held that the full price of an interstate bus ticket may be taxed in the State where travel originates, despite the fact that the service provided, and taxed, extends into other States (see, id., at 187-192; see also, Colonial Pipeline Co. v Traigle, 421 US 100 [corporation franchise tax fairly apportioned as it taxes the incidence of actually doing business as a corporate entity in Louisiana]; Western Live Stock v Bureau, 303 US 250, 258 [business of printing and preparing a magazine distinct from circulation]). Here, the tax does not fall on any interstate activity, but rather on a purely local occurrence — the taxpayer’s status as a resident of New York State.

“[T]he question is whether the State has exerted its power in proper proportion to [the challenger’s] activities within the State and to [its] consequent enjoyment of the opportunities and protections which the State has afforded” (General Motors v Washington, 377 US 436, 441). New York has determined that the taxpayers who spend an inordinate amount of time and maintain a permanent abode here should be taxed accordingly. There is no need to apportion the tax because the incidences of the tax — the time petitioner spends in New York and the maintenance of a permanent abode in this State — both occur entirely within New York.

State universal income taxation of residents is justified by the protections and services which the State affords its residents and which residents, through contacts with the State sufficient to classify them as residents, are privileged to enjoy (see, New York ex rel. Cohn v Graves, 300 US 308). Thus, any claim of facial discrimination is belied by the very nature of the tax; since only New York may tax the income of its residents on the basis of their status as New York residents, there is no danger of another jurisdiction imposing a tax on the Tamagnis as New York residents (see, Oklahoma Tax Commn. v Jefferson Lines, supra, 514 US, at 186-187).

Moreover, while universal income taxation is justified by the protections and services provided by the State of residency, neither due process nor the Commerce Clause requires that the tax bear an exact relation to the services actually provided to the individual taxpayer. If the law were otherwise, all similar taxes would be unconstitutional as currently imposed, since they inherently impose a larger burden upon those with higher incomes, without regard to the level of services utilized. It has long been recognized that “[a] tax measured by the net income of residents is an equitable method of distributing the burdens of government among those who are privileged to enjoy its benefits” (New York ex rel. Cohn v Graves, supra, 300 US, at 313). Thus, the Tamagnis’ claim that they should not be subject to tax on all of their income in this State because they also spend substantial amounts of time in another State and are subject to taxation there is without merit. The New York income tax operates to tax residents as residents of this State, without regard to their activities in other States; so long as the State’s definition of resident does not violate due process (and there is no claim here that it does), no violation of the dormant Commerce Clause is apparent.

IV.

The inapplicability of dormant Commerce Clause analysis to State resident income taxation is further supported by both historical precedent and the fundamental State sovereignty interest at stake. The Supreme Court has long held that multiple taxation of State residents is not forbidden (see, State Tax Commn. v Aldrich, 316 US 174; New York ex rel. Cohn v Graves, supra; Fidelity & Columbia Trust Co. v Louisville, 245 US 54). While this line of cases involved due process challenges, the very fact that the dormant Commerce Clause was never mentioned as a limitation on State power to tax resident income suggests that there is no such limitation. Indeed, in Goldberg v Sweet (488 US 252, 266, supra) the Supreme Court stated that “[i]t is not a purpose of the Commerce Clause to protect state residents from their own state taxes.”

Furthermore, we can conceive of no power more fundamental to the operation of a sovereign State than the power to tax its own residents. In National League of Cities v Usery (supra) the Supreme Court recognized the importance of certain fundamental attributes of State sovereignty, and held that such interests may check even the power of Congress to assert its Commerce Clause power. While Garcia v San Antonio Metro. Tr. Auth. (supra) overruled Usery insofar as the affirmative Commerce Clause power of Congress is concerned, it seems to us entirely appropriate to give the principles of federalism enunciated in Usery weight in assessing the scope of limitations on State taxing power in the absence of Congressional action. Congress itself has recognized that “the right of States to raise revenues in a manner of their own choosing [is] an essential element of a strong and vibrant Federal system” (Limitation on State Taxation of Certain Pension Income, HR Rep No. 776, 103d Cong, 2d Sess 12-13).

Indeed, Congress apparently has a self-imposed higher threshold for exercising its Commerce Clause authority to limit “the right of States to tax economic activities within their borders” (To Clarify State Authority to Tax Compensation Paid to Certain Employees, HR Rep No. 203, 105th Cong, 1st Sess 2). Recently enacted legislation provides evidence of the deference Congress has chosen to give States in taxing residents. By Public Law 104-95 Congress eliminated the ability of States to tax the pension income of nonresident retirees. The legislation provides that “[n]o State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State (as determined under the laws of such State)” (4 USC § 114 [a] [emphasis added]). Thus, in enacting this very limited restriction on State taxing authority, Congress explicitly deferred to State definitions of residency. This evidences a clear current Congressional intent to insulate State taxation of residents from Federal scrutiny.

Thus, inasmuch as the ability of a State to tax its own residents is undoubtedly a “traditional aspect! ] of state sovereignty” (National League of Cities v Usery, supra, 426 US, at 849) historical precedent and fundamental principles of federalism provide further support for our conclusion that the New York resident income tax is not unconstitutional, either on its face, or as applied to these taxpayers.

Accordingly, the judgment of the Appellate Division should be affirmed, with costs.

Notes

1 . “Income from intangible personal property” is defined by Tax Department regulations as “[i] terns of income, gain, loss and deduction attributable to intangible personal property * * * including annuities, dividends, inter est, and gains and losses from the disposition of intangible personal property” (20 NYCRR 132.5 [a]).

2 . Tax Law § 605 (b) (1) (B) provides that a “resident individual” includes one “who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than one hundred eighty-three days of the taxable year in this state”. New York City imposes a similar tax on City residents (see, Administrative Code of City of NY § 11-1705 [b]). Because the City Code provision precisely mirrors Tax Law § 605 (b) (1) (B), for simplicity sake this opinion will refer only to the Tax Law provisions.

3 . The Tamagnis had New York State taxable income of $1,740,897 for 1987, $2,127,838.20 for 1988 and $1,807,928.50 for 1989.

4 . Because Mr. Tamagni spent a number of days in 1989 in parts of New York State outside New York City he qualified as a State resident for that year but the time he spent in New York City fell below the 184-day residency threshold.

5 . The Tamagnis also raised a State constitutional claim that is not pursued before this Court.

6 . Under Tax Department regulations, when a person is present “within New York State for any part of a calendar day,” that day counts toward the 184-day residency threshold (20 NYCRR 105.20 [c]). The validity of this regulation is not challenged here.

7 . By one commentator’s count, “[o]nly Massachusetts, New Mexico, South Carolina, and Wisconsin limit their definition of resident to include domiciliaries alone” (Note, “Resident” Taxpayers: Internal Consistency, Due Process, and State Income Taxation, 91 Colum L Rev 119, 122, n 19).

8 . A tax passes the Complete Auto test if it is “applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” (Complete Auto Tr. v Brady, supra, 430 US, at 279.) The Supreme Court has sometimes applied the internal consistency test in determining whether the tax is fairly apportioned and discriminates against interstate commerce. A tax fails the internal consistency test if, were the same tax imposed by another State, multiple taxation would result (Container Corp. v Franchise Tax Bd., supra).

9 . It is unclear whether the claim here is that the tax discriminates against or unduly burdens interstate commerce. The dissent contends that the issue is whether the tax is unduly burdensome, regardless of its discriminatory impact. The Tamagnis, however, appear to argue that the tax “discriminates against” interstate commerce (see, petitioner’s reply brief, at 2). As the Supreme Court noted in General Motors Corp. v Tracy (supra, 519 US, at 298, n 12) there is “no clear line between these two strands of analysis” and for present purposes, at least, the distinction is unimportant.

10 . The North Carolina franchise (or corporate income) tax is typical of that imposed by many States. It imposes a tax upon a corporation’s income earned within the State. Because of the difficulties of apportioning the income of an integrated interstate and international corporation, States typically utilize a unitary business apportionment formula which “calculates the local tax base by first defining the scope of the ‘unitary business’ of which the taxed enterprise’s activities in the taxing jurisdiction form one part, and then apportioning the total income of that ‘unitary business’ between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account objective measures of the corporation’s activities within and without the jurisdiction” (Container Corp. v Franchise Tax Bd.., supra, 463 US, at 165).

---

Dissenting Opinion

Titone, J.

(dissenting). I disagree with the majority that New York’s tax on the intangible assets of the Tamagnis does not substantially affect interstate commerce. The majority argues that New York is not taxing interstate commerce because, in taxing income from intangibles, it is not taxing anything that moves across State lines in trade or commerce. Therefore, in the majority’s view, the tax is “completely indif ferent to the interstate activities” in which the Tamagnis engage. The majority is wrong because the question is not whether interstate commerce is taxed, but whether, as the United States Supreme Court has consistently held, interstate commerce is substantially affected by the tax (Camps Newfound/Owatonna v Town of Harrison, 520 US 564; Fulton Corp. v Faulkner, 516 US 325; Tyler Pipe Indus. v Department of Revenue, 483 US 232; Armco Inc. v Hardesty, 467 US 638).

Purely in-State taxes can still substantially affect interstate commerce, and the case law is replete with examples. The fact that taxes are levied on New York statutory residents does not make this a purely New York affair. In Fulton Corp. v Faulkner, the Court struck down an intangibles tax on North Carolina State residents because the tax had the effect of discriminating against out-of-State corporations by taxing their dividends more if they remained outside of the State (516 US 325, supra). In Camps Newfound/Owatonna v Town of Harrison, the Court struck down a State tax on summer camps (and other charitable organizations) that imposed a lower tax rate on those serving in-State residents, as opposed to those who served out-of-State residents (520 US 564, supra). The fact that the camp was enjoyed in Maine, and that the tax was on a Maine business, did not change the fact that the tax on a Maine summer camp, 95% of whose campers came from out-of-State, was substantially affecting interstate commerce (id.; see, Commonwealth Edison Co. v Montana, 453 US 609 [tax on coal only mined in State still subject to dormant Commerce Clause protections]). Although the town imposing the tax on the Maine summer camp tried to argue that the tax was like a real estate tax, the Court firmly rejected the idea. It held that “[t]o allow a State to avoid the strictures of the dormant Commerce Clause by the simple device of labeling its discriminatory tax a levy on real estate would destroy the barrier against protectionism that the Constitution provides” (520 US 564, 575, supra).

Here, New York, under the majority’s reasoning, is attempting to do the same thing. The majority labels the tax, a tax on intangibles or a tax on New York residents, but these labels are not enough to eliminate the effect that this tax has on interstate commerce. The tax at issue is imposed by New York on those domiciled in other States, who, like the Tamagnis, come to New York and remain for a portion of at least 184 days and who maintain a “permanent place of abode” in New York (Tax Law § 605 [b] [1]; §§ 612, 620 [a]). Although the “permanent place of abode” required under Tax Law § 605 (b) (1) is in New York, this statute, which is aimed at nondomiciliaries, also clearly contemplates that the person maintaining the abode comes from another State. Here, for example, petitioner, though not domiciled in New York, works here, and, as a result, he must travel into New York on a regular basis. He maintains a residence here and bought an apartment here to facilitate his ability to engage in his interstate economic and commercial activity.

The movement of people across State borders for economic purposes has previously been held to implicate interstate commerce (see, Camps Newfound / Owatonna v Town of Harrison, 520 US 564, supra; Edwards v California, 314 US 160, 172; see also, W.C.M. Window Co. v Bernardi, 730 F2d 486, 494 [7th Cir] [restriction of “flow into Illinois of labor services” is similar under a Commerce Clause analysis to the “flow of coal”]; Chamber of Commerce v State, 89 NJ 131, 160, 445 A2d 353, 368 [entry into State of those who would seek to break a labor strike constituted commerce]). As to the purchase of property, the Supreme Court in Camps Newfound/Owatonna, assumed, without deciding, that the Congress could impose a national real estate tax, and, as a result, even the purchase of property can exhibit substantial effects on interstate commerce (Camps Newfound/Owatonna v Town of Harrison, 520 US 564, supra [activities that trigger protections of dormant Commerce Clause are those which can be reached by Congressional regulation under commerce power]).

The fact that Congress has recently enacted a law regarding limitations on a State’s ability to tax nonresidents does not support the majority’s argument (see, 4 USC § 114 [a], added by Pub L 104-95). It undercuts it. If Congress’s commerce power can reach a State’s right to tax its residents, it naturally follows that taxation of residents is an activity that substantially affects interstate commerce.

Once a State tax is determined to substantially affect interstate commerce, the question then becomes whether the tax unduly burdens interstate commerce. A State tax will do so, among other things, if it imposes a risk of multiple taxation. That risk is clearly prohibited by Complete Auto Tr. v Brady (430 US 274) and its progeny. Under Complete Auto Tr. v Brady, the State tax will pass muster under the dormant Commerce Clause only if it satisfies a four-fold inquiry. New York’s tax (1) must apply to an activity with a substantial nexus with the taxing State, (2) must be fairly apportioned, (3) cannot discriminate against interstate commerce, and (4) must fairly relate to the services provided by the State (Complete Auto Tr. v Brady, supra, 430 US, at 279).

The Complete Auto test should be applied in this case. It ensures that State taxes do not disrupt the national economy by burdening or discriminating against interstate commerce,¹ while at the same time allowing for State taxation of those activities that are properly attributable to a State (Quill Corp. v North Dakota, 504 US 298, 312). Specifically, here, the Complete Auto test applies because New York is taxing out-of-State domiciliaries who travel across State lines for economic or commercial purposes. Such a situation requires an analysis as to whether the State tax violates the dormant Commerce Clause and does not infringe upon its protection of the free flow of trade and economic activity across State borders. The United States Supreme Court has consistently applied this test to determine whether a State tax that substantially affects interstate commerce is constitutional under the dormant Commerce Clause (Goldberg v Sweet, 488 US 252, 260-261; Tyler Pipe Indus. v Department of Revenue, 483 US 232, 247, supra; Armco Inc. v Hardesty, 467 US 638, 644-645).

The pertinent part of the Complete Auto test in this case, as petitioners argue, is whether the tax is fairly apportioned. Fair apportionment, in the verbiage of taxation, means that the State tax is “internally consistent” (see, Container Corp. v Franchise Tax Bd., 463 US 159, 169; Goldberg v Sweet, supra, 488 US, at 261). As the United States Supreme Court has repeatedly held, a reviewing court determines “internal consistency” by supposing that all the States have adopted the State taxing scheme at issue and then determines whether there is the risk of multiple taxation (Oklahoma Tax Commn. v Jefferson Lines, 514 US 175, 179, supra; Tyler Pipe Indus. v Department of Revenue, 483 US 232, 235-236, supra; Armco Inc. v Hardesty, supra, 467 US, at 644-645; Container Corp. v Franchise Tax Bd., supra, 463 US, at 169).

The New York tax scheme fails that test. Assuming that all other States adopted New York’s tax law, there would be the risk of multiple taxation of a taxpayer’s income from intangible assets. If New York’s tax law applied in all States, an individual who spent a portion of over 183 days in three States and maintained a residence in each of these three States would have to pay tax on their income from intangible assets in all three. Multiple taxation is the event to be avoided, but New York has not avoided that risk in its tax law. The fact that in this case New Jersey granted the petitioners a tax credit for the taxes paid on income from intangibles does not change the analysis (see, NJ Stat Annot § 54A:4-1). The United States Supreme Court has been clear that only the risk of multiple taxation is required (see, Goldberg v Sweet, supra, 488 US, at 261; Armco Inc. v Hardesty, supra, 467 US, at 645). “Any other rule would mean that the constitutionality of [a State’s] tax laws would depend on the shifting complexities of the tax codes of 49 other States, and that the validity of the taxes imposed on each taxpayer would depend on the particular other States in which it operated” (Armco Inc. v Hardesty, 467 US, at 644-645). In other words, all that is required under the internal consistency test is the risk of multiple taxation, and here, there is a clear risk of a multiple taxation burden.

New York could have avoided this burden by recognizing a credit for taxes paid to other States on income from intangible assets (cf., Goldberg v Sweet, supra, 488 US, at 263-264 [Illinois’s credit for taxes paid to other States cured multiple taxation problem]). New York, however, has not removed the risk of multiple taxation through a tax credit. As a result, the statute that triggers this risk, Tax Law § 605 (b) (1), is unconstitutional under the dormant Commerce Clause.

The majority argues that the Complete Auto test should not apply. It, in essence, states that the test should not be used because it would be impossible to find discrimination against interstate commerce in this case. Relying on General Motors Corp. v Tracy (519 US 278), the majority asserts that before there can be a finding of discrimination there must be “similarly situated” in-State and out-of-State participants in an “identifiable interstate market.” It asserts that the Tamagnis’ situation here does not fit within this framework. As the Supreme Court has noted, “The fact that [a State tax] ‘has the advantage of appearing nondiscriminatory’ * * * does not save it from invalidation”² (Tyler Pipe Indus. v Department of Revenue, supra, 483 US, at 248).

The majority analysis is inapposite. The dormant Commerce Clause protects against two impediments to interstate commerce. One is discrimination and the other is undue burden (see, Quill Corp. v North Dakota, supra, 504 US, at 312 [noting these two protections under the dormant Commerce Clause]). A State may not discriminate against out-of-State participants in interstate commerce in favor of in-State interests, but a State also may not impose cumulative burdens on interstate commerce (id.). This case is an undue burden case (see, e.g., Kassel v Consolidated Freightways Corp., 450 US 662). The Tamagnis come to New York to work and have bought property in the State, but they are discouraged from doing so by the burden that the New York tax law creates. The dormant Commerce Clause prohibits such tax burdens unless they comply with Complete Auto. It does not logically follow from the fact that there may or may not be discrimination against interstate commerce in this case that there is no undue burden on interstate commerce (see, Quill Corp. v North Dakota, supra, 504 US, at 312). Discrimination against interstate commerce is only one prong of the Complete Auto test and is only one of the problems to be avoided.

The majority relies on Oklahoma Tax Commn. v Jefferson Lines (514 US 175, supra) to conclude that if the Complete Auto test applies in this case there is no need for fair apportionment because New York is taxing a resident, which is a “separable local occurence” in New York. Residency under New York’s definition, according to the majority, is incapable of repetition elsewhere. As the internal consistency test shows, the interstate activities on which the tax is based are capable of repetition in another State (see, Goldberg v Sweet, supra, 488 US, at 262-264 [other States could tax interstate phone calls which Illinois taxed]).

The activities here are not purely local. New York’s tax on residents cannot be likened to a sales tax on a bus ticket as was upheld in Oklahoma Tax Commn. v Jefferson Lines (supra). The sale of a bus ticket is a “separable local” event. The bus ticket would only be sold once, and thus the State in which this one event occurred could tax it. Similarly, in Western Live Stock v Bureau of Revenue: “All the events upon which the tax is conditioned — the preparation, printing and publication of the advertising matter, and the receipt of the sums paid for it — occur in [just one State] and not elsewhere” (303 US 250, 260). The subject of a tax is not a local event whiere, as here, it is conditioned on a domiciliary of another State coming to New York 184 times a year who engages in commercial activity. New York’s tax does not fall on a local event. It is triggered by interstate commercial activity, and falls not on a local event, but on the income from intangible assets which are capable of being taxed elsewhere. The failure to fairly apportion the tax in such an instance, as New York has failed to do here, is fatal.

Even assuming the tax burdens interstate commerce, the majority then goes on to hold that the tax New York imposes is constitutionally sufficient on State sovereignty grounds. The dormant Commerce Clause, it says, is inapplicable to State resident income taxation, which is a State’s traditional prerogative. A State, of course, is not prohibited from taxing its residents and, moreover, a State may define its residents in any way that comports with due process (see, Shaffer v Carter, 252 US 37).

What a State may not do, however, is impose cumulative burdens on interstate commerce, or, in other words, a State may not impose the risk of multiple taxation on those engaging in interstate commerce. Although the majority cites many due process cases for the proposition that multiple taxes on the same income of a resident is constitutional, it will not find, and cannot cite one dormant Commerce Clause case that so holds. The Due Process Clause, on which the majority relies, and the dormant Commerce Clause, “are animated by different constitutional concerns and policies” (Quill Corp. v North Dakota, 504 US 298, 312, supra). Due process concerns “the fundamental fairness of governmental activity” (id., at 312). The dormant Commerce Clause involves “structural concerns about the effects of state regulation on the national economy” including “state taxes and duties [that have] hindered and suppressed interstate commerce” (id., at 312). While imposing a tax may be “fundamentally fair,” the State tax may nonetheless be constitutionally infirm because it “hinder[s] and suppressed] interstate commerce” (cf., id., at 312-313). Jurisdiction to tax and burdening interstate commerce involve different constitutional concerns.³

Although it is a State’s traditional prerogative to tax its residents, it is not a State’s prerogative to unduly burden interstate commerce. The main case that the majority relies on, National League of Cities v Usery (426 US 833), was concededly overruled nine years later by Garcia v San Antonio Metro. Tr. Auth. (469 US 528). There is simply no State sovereignty exception to the dormant Commerce Clause.

Here, by failing to grant a tax credit for taxes paid to other States on income from intangible assets, New York has created the risk of multiple taxation. That violates the dormant Commerce Clause, and I dissent.

Chief Judge Kaye and Judges Bellacosa, Smith, Levine and Ciparick concur with Judge Wesley; Judge Titone dissents and votes to reverse in a separate opinion.

Judgment affirmed, with costs.

1 . The United States Supreme Court has long recognized that a lack of economic union among the States will be at the expense of political union (see, Oklahoma Tax Commn. v Jefferson Lines, 514 US 175, 179-183; Complete Auto Tr. v Brady, 430 US 274, 280-284, supra [both compiling cases and recounting history]; Gibbons v Ogden, 9 Wheat [22 US] 1 [1824] [Marshall, Ch. J., in dictum]). As a result, the Commerce Clause had to have a dormant or negative aspect that prohibited the States from erecting barriers to the free flow of trade and commerce across State lines (see, Camps Newfound/Owatonna v Town of Harrison, 520 US 564, 571-572, supra). This dormant aspect may be as, if not more, important than Congress’s power to regulate under the Commerce Clause in order to ensure the “united” in United States (see, The Federalist Nos. 42 [Madison], 7 and 11 [Hamilton]). The dormant Commerce Clause also works to prevent the problem of taxation without representation. A tax on a nondomiciliary, which means he or she does not vote in the taxing State, is “not likely to be alleviated by those political restraints which are normally exerted on legislation where it affects adversely interests within the state” (McGoldrick v Berwind-White Co., 309 US 33, 45-46, n 2).

2 . As the Court in General Motors Corp. v Tracy noted, many dormant Commerce Clause cases exhibit both an “undue burden on” and “discrimination against” interstate commerce (519 US 278, 298-299, n 12, supra). This “discrimination framework” is present here, and also demonstrates that New York’s tax may fail. Out-of-State domiciliaries are similarly situated to New York domiciliaries. Each has the same relationship to his or her State of domicile and is subject to tax there. But under New York’s tax law, those out-of-State domiciliaries that cross into New York to work, and thus participate in the labor market, and who also maintain a place to live in New York, and thus participate in the property market, are subject to the risk of multiple taxation. Those persons domiciled in New York and who also work and buy or rent property in New York are not subject to this risk. As a result, New York’s tax law discriminates against out-of-State participants in its labor and property markets because the risk attendant on that participation are not borne by both New York and out-of-State domiciliaries. New York domiciliaries have an advantage in that their working and having a place to live in New York would not risk multiple taxation.

Furthermore, the majority’s analysis is flawed in one other simple respect. To require an “identifiable interstate market” would mean that a market which is protected by State regulation to the exclusion of interstate competition could never present a dormant Commerce Clause problem because that market could never meet the threshold showing that it was an interstate market. To the contrary, “ ‘[o]ur system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he [or she] will have free access to every market in the Nation’ ” (General Motors Corp. v Tracy, 519 US 278, 299, supra, quoting Hood & Sons v Du Mond, 336 US 525, 539).

The majority takes the narrow exception of General Motors Corp. v Tracy as the rule. In that case, the Court recognized that the captive, noncompetitive, residential natural gas market was so local and the product it distributed so essential to health and safety that the State could subject local distribution companies which served that market to different tax treatment (519 US 278, supra). Here, there is no intimation that such an exceptional circumstance exists in the New York property or labor markets.

3 . The “Complete Auto test, while responsive to Commerce Clause dictates, encompasses as well * * * due process requirement [s]” (Trinova Corp. v Michigan Dept. of Treasury, 498 US 358, 373).

Case Details

Case Name: Tamagni v. Tax Appeals Tribunal

Court Name: New York Court of Appeals

Date Published: May 14, 1998

Citations: 91 N.Y.2d 530; 695 N.E.2d 1125; 673 N.Y.S.2d 44; 1998 N.Y. LEXIS 1071

Court Abbreviation: N.Y.