On October 27, 2016, the Supreme Court of Mississippi (Court) in AT&T Corp.,¹ held that Mississippi's dividend received exemption under Miss. Code Ann. Section 27-7-15(4)(i), which limited the amount of dividends received from a corporation to that corporation's apportionment to Mississippi, violates the dormant Commerce Clause of the US Constitution. The Court further held that the appropriate remedy was to strike the unconstitutional provisions from the Mississippi statute, which eliminated the taxpayer's Mississippi corporate income tax assessment for the years at issue.

Mississippi statutory scheme

Miss. Code Ann. Section 27-7-15(4)(i) exempts from taxation "[i]ncome from dividends that has already borne a tax as dividend income under the provisions of this article, when such dividends may be specifically identified in the possession of the recipient." In other words, a corporation could only claim an exemption for dividends received from another corporation to the extent that the corporation from which those dividends were received was doing business in Mississippi and filed a Mississippi income tax return for the year the dividends were issued.

Facts

In 2003, the Mississippi Department of Revenue² (Department), issued a corporate income tax assessment against AT&T Corporation (AT&T) for the years 1997-1999, refusing to allow complete deductions for dividends received from other corporations, citing Miss. Code Ann. Section 27-7-15(4)(i). AT&T appealed to the Board of Review of the Mississippi Tax Commission (Commission) and then to the full Commission, which affirmed the assessment, in part, in the amount of $10,703,608, leaving as the sole issue the denial of AT&T's dividends received exemption. In 2004, AT&T appealed the order of the Commission to the Hinds County Chancery Court.³ The chancery court analyzed Miss. Code Ann. Section 27-7-15(4)(i) and concluded that the statute denies the benefit of deducting dividends from gross income "based solely upon the choice of the taxpayer and its subsidiaries not to locate any operations in Mississippi or to file a Mississippi income tax return."⁴ Because the statute favored domestic corporations over foreign competitors, the chancery court granted AT&T's motion for summary judgment on the ground that the statute was facially discriminatory and the chancery court ultimately invalidated the assessment.

Mississippi Supreme Court decision

After analyzing the Mississippi statute under the dormant Commerce Clause, the Court, citing the prohibition of state discrimination against interstate commerce,⁵ concluded that the second prong of the Complete Auto Transit test (i.e.whether the dividend-received exemption provided in Miss. Code Ann. Section 27-7-15(4)(i) is fairly apportioned), was dispositive in the case.

Citing Oklahoma Tax Comm'n. v. Jefferson Lines, 514 U.S. 175, 184 (1995), the Court applied an internal consistency analysis to the exemption. The Court noted that internal consistency exists when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear. The Court analyzed a litany of Commerce Clause cases and hypothetical scenarios advanced by both parties. Influenced by the recent US Supreme Court decisions in Maryland v. Wynne, 135 S. Ct. 1787 (2015) and Jefferson Lines, the Court concluded that AT&T's total tax burden was disparate because, with regard to AT&T's non-nexus subsidiaries, AT&T bore an additional burden from which its nexus subsidiaries were exempt. Hence, the exemption lacked internal consistency and the Court held that its application resulted in malapportionment, violating the dormant Commerce Clause. The Court declined to address whether the exemption violated Due Process and the Equal Protection Clause of the 14th Amendment.

In regard to a remedy, the Court struck the "under the provisions of this article" language from Miss. Code Ann. Section 27-7-15(4)(i) to preserve the Mississippi legislature's intent to include dividend income in the definition of income, while also allowing an exemption to taxpayers that already have borne a tax in Mississippi or in another state. The Court's remedy resulted in no additional income tax liability to AT&T for the years at issue.

Implications

It is unknown at this time whether the Department will seek review of the Court's decision by the US Supreme Court. The ruling by the Court likely has implications for other taxpayers that have been denied the exemption for dividends received from affiliates that did not do business or file a tax return in Mississippi. These taxpayers should consider potential refund claims. Miss. Code Ann. Section 27-7-313 prescribes a three-year statute of limitations on refund claims running at the due date of the return, including extensions.

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ENDNOTES

¹ Mississippi Dep't. of Rev. v. AT&T Corp., No. 2015-CA-00600-SCT (MS S. Ct. Oct. 27, 2016).

² Formerly the Mississippi State Tax Commission.

³ AT&T also posted an appeal bond in the amount of $23,728,596, twice the revised assessment fulfilling a procedural requirement that, when not fulfilled in a prior assessment for 1993-96, resulted in the dismissal of AT&T's case by the Court in a 2012 decision. Mississippi Dep't. of Revenue v. AT&T Corp., 101 So. 3d 1139 (Miss. 2012).

⁴ AT&T Corp. v. Mississippi Dep't. Revenue, Mississippi Chancery Court, Hinds County, Cause No. G-2004-1393 (March 20, 2015).

⁵ Commonwealth Brands, Inc. v. Morgan, 110 So. 3d, 752, 758 (Miss. 2013) citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).