Double Taxation? Entitlement to use Unapplied Credit for Out of State Income Tax Paid to reduce Philadelphia City Wage Tax

Zilka v. Tax Review Board City of Philadelphia, 2022 WL 67789 (Pa. Cmwlth.) (unpublished), allocatur granted July 5, 2022, appeal dockets 20 and 21 EAP 2022

Taxpayer Zilka, a  Philadelphia resident, worked full time in Wilmington, Delaware. Taxpayer claimed a credit for the Delaware Tax (5%) she paid to offset the Pennsylvania Tax (3.07%) on her Pennsylvania Personal Income Tax (PIT) return; Pennsylvania allowed a full credit. Taxpayer also claimed a credit for the Wilmington Tax (1.25%) she paid and the balance of the Delaware Tax (5% – 3.07% = 1.93%) to offset the Philadelphia Wage Tax (3.92%). Philadelphia allowed a credit for the Wilmington Tax against the Philadelphia Wage Tax but not for the remainder of the Delaware Tax. Taxpayer claimed that Philadelphia’s refusal to apply the remainder of the Delaware Tax as credit against the Philadelphia Wage Tax amounted to an unconstitutional burden on interstate commerce. Taxpayer’s appeal was denied by the Philadelphia Court of Common Pleas.

On appeal to Commonwealth Court, Taxpayer argued that the trial court erred by denying her a credit against her Philadelphia Wage Taxes for the portion of income taxes that she paid to Delaware, which was not credited against her income taxes paid to Pennsylvania. Taxpayer contends that the failure to award a credit amounts to double taxation in violation of the Commerce Clause, U.S. Const. art. 1, §8, cl. 3. Commonwealth Court disagreed, and affirmed the trial court, reasoning:

Upon review, Taxpayer’s income is not being doubly taxed. Taxpayer never pays more than one local tax or more than one state tax. In other words, Philadelphia is not taxing Taxpayer’s income “more heavily when it crosses state lines than when it occurs entirely within the State.” [Treasury of Maryland v.] Wynne, 575 U.S. [542,] 549 [(2015)].  Rather, Philadelphia is taxing Taxpayer the same as other residents who worked intrastate – 3.92%. Although we recognize that Taxpayer pays 1.93% more than her intrastate counterparts, that is because Taxpayer chose to work in Delaware, which charges a higher income tax than Pennsylvania. As the trial court recognized, Delaware’s higher income tax “is neither unconstitutional, nor attributable to any unconstitutional action taken by . . . Philadelphia.” Trial Court Op., 8/28/2019, at 5. While Wilmington charges less than Philadelphia, Philadelphia credited 100% of the Wilmington Tax to offset the Philadelphia Wage Tax. The fact that Philadelphia chose not to additionally apply credit for the “unused” balance of the Delaware Tax towards its Wage Tax does not amount to double taxation. See Wynne.

Slip Op. at 5-6.

The court went on to examine whether the Philadelphia wage tax as applied withstands scrutiny under the United States Supreme Court’s test in the seminal case Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).  Complete Auto lays out a four-prong test to determine whether a state or local tax unconstitutionally burdens interstate commerce. The test requires: (1) the activity must have a substantial nexus with the taxing district; (2) the tax must be fairly apportioned; (3) the tax does not discriminate against interstate commerce; and (4) there must be a reasonable relationship between the tax imposed upon the taxpayer and the services provided by the taxing district.  Focusing on the second and third prongs, the Commonwealth Court found the tax as applied to be constitutional. Fair apportionment requires both internal and external consistency. The Philadelphia tax is internally consistent, the court reasoned, because if every jurisdiction imposed  the same tax as Philadelphia, all taxpayers earning income outside of their home locality would receive a credit for taxes paid to the foreign locality, and any additional tax owed would result from the higher tax rate in the foreign state. The tax is externally consistent, the court reasoned, because “Philadelphia fairly apportions the tax according to its relation to the income by providing a credit for the tax owed to Wilmington. Philadelphia avoided taxing more than its fair share of Taxpayer’s wages by providing a tax credit for 100% of the Wilmington Tax.” Slip Op. at 9.

As to discrimination, the court reasoned none exists:

Taxpayer is not paying income tax twice on her interstate income. Rather, Taxpayer is paying the same 3.92% rate as her Philadelphia counterparts. The difference is that Philadelphia is receiving only 2.67%, while Wilmington is receiving 1.25%. By extending a full credit for taxes paid to Wilmington, Taxpayer’s income is not subject to double taxation. There is no disparate treatment or discrimination between Taxpayer and other resident taxpayers of Philadelphia.

Slip Op. at 10.

In conclusion, Commonwealth Court reasoned:

Although we understand that Taxpayer pays more than her intrastate counterparts, such is not the result of an unconstitutional tax scheme. Rather, it is simply the “result of the interaction of two different but nondiscriminatory and internally consistent schemes.” Wynne, 575 U.S. at 562. Taxpayer chose to work in a jurisdiction with a higher tax rate. Philadelphia is not responsible for the fact that Delaware charges 1.93% more than Pennsylvania. Consequently, even after Philadelphia and Pennsylvania applied credits to corresponding income taxes paid to Wilmington and Delaware, respectively, Taxpayer’s income was subject to a higher tax rate because of tax disparities that exist between the taxing districts, not because of a discriminatory policy or practice. In short, Taxpayer is not paying income tax twice on her interstate income. There is no support for Taxpayer’s position that local and state taxes must be aggregated for Commerce Clause purposes. Philadelphia and Pennsylvania are two distinct taxing jurisdictions administering two distinct taxes to two different sets of citizenry.

Slip Op. at 14.

The Supreme Court granted allocatur. The issue, as stated by Taxpayer, is:

Petitioner, a Philadelphia resident who worked in Wilmington, Delaware, was subject to Pennsylvania Personal Income Tax (“PIT”), Philadelphia City Wage Tax (“Wage Tax”), Delaware Income Tax (“DIT”) and Wilmington Earnings Tax (“Wilmington Tax”). Pennsylvania allowed Petitioner to credit DIT paid against her PIT liability. The City of Philadelphia (“City”) allowed Petitioner to credit Wilmington Tax paid against her Wage Tax liability. DIT Petitioner paid exceeded the PIT credit she was allowed (“Unapplied Credit”). The City did not allow Petitioner to apply the Unapplied Credit against the Wage Tax. The U.S. Supreme Court held the Commerce Clause of the U.S. Constitution dictates that taxing jurisdictions must grant their residents a credit for state and local income taxes paid to other state and local taxing jurisdictions. Comptroller of Maryland v. Wynne, 135 S. Ct. 1787 (2015) (“Wynne”). Did the Commonwealth Court err, as a matter of law, where it held it was constitutional for the City not to apply Petitioner’s Unapplied Credit against her Wage Tax liability?


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