James Goggin v. State Tax Assessor
2018 ME 111, 191 A.3d 341 (2018)
Rule of Law:
A state's individual income tax credit for out-of-state taxes applies only to income taxes directly imposed on the individual, not to business taxes paid by a pass-through entity in which the individual is a member, and such a statute does not violate the dormant Commerce Clause if it satisfies the internal consistency test.
Facts:
- James and Ann Goggin lived in Maine at all relevant times and filed joint federal and State income tax returns.
- GHK Company, LLC, was formed in New Hampshire in 1994 to own, develop, maintain, and lease a parcel of commercial real estate in New Hampshire.
- For the 2012 through 2014 tax years, GHK Company, LLC, was classified as a partnership for federal income tax purposes and received rental income from its property.
- For each of those three years, Ann Goggin was allocated a percentage interest in the profits and losses of GHK Company, LLC.
- The State of New Hampshire imposed both a 'business profits tax' and a 'business enterprise tax' on GHK Company, LLC, for these tax years.
- GHK Company, LLC, took deductions for the New Hampshire business taxes it paid on its federal 'Return of Partnership Income' forms, reducing the rental income amounts reported to the federal government, which in turn reduced Ann Goggin’s share reported on Schedule K-1.
- The Goggins' joint federal and Maine income tax returns for 2012-2014 reported income from GHK Company, LLC, that did not include any income the LLC had received but then paid in New Hampshire business taxes.
- In January 2016, the Goggins filed amended Maine tax returns for the 2012, 2013, and 2014 tax years seeking a personal income tax credit for Ann’s proportional share of the New Hampshire business taxes paid by the LLC, without adding back the deducted income to their Maine adjusted gross income.
Procedural Posture:
- Maine Revenue Services denied the Goggins' request for a refund based on their amended Maine tax returns for the 2012-2014 tax years.
- The Goggins requested reconsideration of the denial.
- The State Tax Assessor issued a written decision dated September 21, 2016, upholding the denial of their claims for refunds.
- The Goggins then filed a petition for judicial review of the Assessor's final agency action and a de novo determination of all facts and law in the Superior Court.
- Upon the parties’ agreement and the Goggins’ application, the matter was accepted for transfer to the Business and Consumer Docket.
- The Business and Consumer Docket court affirmed the judgment of the Assessor, concluding that no income tax credit applied and Maine’s tax statutes do not violate the Commerce Clause.
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Issue:
Does a Maine resident qualify for an individual Maine income tax credit for the portion of business taxes paid by a New Hampshire limited liability company (LLC) proportional to their membership interest, and does Maine's refusal to grant such a credit violate the Commerce Clause of the United States Constitution?
Opinions:
Majority - Saufley, C.J.
No, a Maine resident is not entitled to a Maine income tax credit for the portion of business taxes imposed by New Hampshire on an LLC of which the resident is a member, and Maine's income tax statutes, as applied, do not violate the Commerce Clause. The Maine Supreme Judicial Court affirmed the Business and Consumer Docket's judgment. The Court began by interpreting Maine's tax credit statute, 36 M.R.S. § 5217-A, which allows a credit for “income tax imposed on that individual” by another state. It emphasized that the plain meaning of this phrase excludes taxes imposed on, and paid by, business entities, as New Hampshire's business profits tax and business enterprise tax were imposed directly on the LLC, not on Ann Goggin as an individual. The Court noted that tax credits, like exemptions, are matters of legislative grace and must be construed narrowly, opposing any interpretation that would grant a "windfall" to taxpayers who already benefited from the deduction of these business taxes from their federal adjusted gross income. The Court distinguished Tarrant v. Dep’t of Taxes, noting that Maine's statute uses the term of art "income tax" rather than broader language, and that the LLC in Tarrant was a Vermont LLC bound by Vermont's laws. Turning to the Commerce Clause challenge, the Court applied the four-part test from Complete Auto Transit, Inc. v. Brady and the internal consistency test from Comptroller of the Treasury of Maryland v. Wynne. The Goggins primarily argued that Maine's statute was unfairly apportioned and discriminated against interstate commerce. However, the Court found that Maine's statute expressly allows a credit for individual income taxes paid to other states, thereby satisfying Wynne. The Court stressed that the challenged taxes were imposed on a business entity, not an individual, and neither the U.S. Supreme Court nor Maine precedent requires a credit for taxes imposed on out-of-state business entities. Applying the internal consistency test, the Court concluded that if all states had Maine's tax statutes (including how they treat pass-through entities), there would be no disproportionate taxation of out-of-state income. The perceived "difficulty" for the Goggins arose from New Hampshire's "unusual scheme" of taxing pass-through entities at the entity level, which differs from Maine's treatment of its own LLCs, rather than from any defect in Maine's tax laws.
Analysis:
This decision significantly clarifies the narrow scope of Maine's individual income tax credit statute, establishing that it does not extend to business entity-level taxes paid to other states, even for pass-through entities. By affirming the strict construction of tax credits and preventing a "windfall" where taxpayers receive both a deduction and a credit for the same out-of-state tax, the ruling reinforces the principle that taxpayers must clearly fall within the statutory language to claim such benefits. Furthermore, the case provides important guidance on the application of the dormant Commerce Clause, particularly the internal consistency test, in the context of state tax variations for business entities. It suggests that disparities in tax outcomes resulting from another state's unique entity-level taxation scheme, rather than the resident state's credit provisions, are less likely to constitute unconstitutional discrimination against interstate commerce, placing the onus on the taxing state's specific laws.
