On Jan. 13, the U.S. Supreme Court declined to hear Zilka v. City of Philadelphia Tax Review Board,1 despite the urging of tax professionals and other organizations.
At issue was whether state and local taxes must be aggregated in applying the U.S. Constitution’s commerce clause in a situation analogous to that addressed in the 2015 Supreme Court decision in Comptroller of the Treasury of Maryland v. Wynne.2
Many tax practitioners saw Philadelphia resident Diane Zilka’s petition for certiorari as an opportunity to resolve an apparent state split in the application of Wynne. Following the Supreme Court’s denial of the petition, it is unclear whether other state courts will follow the Pennsylvania Supreme Court’s 2023 ruling in Zilka’s case in its distinction between state and local taxes.
Zilka, who worked in Wilmington, Delaware, sought a tax credit against her Philadelphia (3.922%) and Pennsylvania (3.07%) income taxes for income taxes she paid to Wilmington (1.25%) and Delaware (5%). The Pennsylvania Department of Revenue granted her a credit for her Delaware income tax to completely offset the Pennsylvania tax paid, leaving her with 1.93% in Delaware income tax that was not offset.
In addition to the state income tax credit, Zilka was granted a credit against her Philadelphia tax for the Wilmington tax paid, leaving her with 2.672% in Philadelphia tax, which she claimed should be offset by the remaining 1.93% of Delaware income tax owed.
Zilka argued the denial of the 1.93% offset caused her to be taxed twice for the same income, which she claimed ran afoul of the negative commerce clause by discriminating against interstate commerce and subjecting her to more tax because she worked out of state.
Comptroller v. Wynne
Zilka argued that the denial of her refund claim was inconsistent with the Supreme Court’s 2015 Wynne ruling. In the Wynne case, Maryland residents who earned pass-through income from several states claimed an income tax credit for taxes paid to other states. The state comptroller permitted the credit against the residents’ Maryland state income taxes, but not against the county income taxes. The comptroller then assessed a tax deficiency.
The Maryland Court of Appeals evaluated the tax under the U.S. Supreme Court’s 1977 ruling in Complete Auto Transit Inc. v. Brady,3 which looked at whether (1) there is substantial nexus with the taxing state, (2) the tax is fairly apportioned, (3) the tax does not discriminate against interstate commerce, and (4) the tax is fairly related to the services provided by the taxing state.
The Supreme Court in Wynne held that Maryland’s tax scheme failed the second and third prongs, and therefore was unconstitutional, as it denied the residents a credit for county taxes paid to other states.
Pennsylvania Supreme Court
The Pennsylvania Supreme Court distinguished the state and local taxes at issue from the Maryland county tax in the Wynne case. In the Wynne case, the court determined that the county taxes were essentially state taxes, as they were imposed and collected by the state. In contrast, the Philadelphia tax in Zilka’s case was enacted by Philadelphia’s City Council and independently enforced by the City Department of Revenue.
Based on this distinction, the Pennsylvania Supreme Court in Zilka’s case determined that independent local taxes do not need to be aggregated with state taxes when analyzing whether a tax scheme violates the dormant commerce clause. Therefore, despite the fact that Zilka paid more state and local taxes by virtue of her work in Delaware, the court determined that Philadelphia’s tax scheme satisfied the Complete Auto tests. Thus, the court determined that Philadelphia did not discriminate against interstate commerce by denying Zilka the additional 1.93% credit for taxes paid to another state.
Notably, the court observed that holding otherwise would in effect cause Philadelphia to subsidize the higher tax rate in Delaware.
Concerns for the Uneven Application of Wynne Across State Lines
In Zilka’s petition for certiorari, she contended, among other things, that the Pennsylvania Supreme Court’s decision created a split between Pennsylvania and other states that aggregated state and local taxes based on the holding in Wynne. Specifically, Zilka noted in her petition:
The Pennsylvania Supreme Court’s ruling on this issue created a square and acknowledged state court conflict because it expressly rejected the West Virginia and Colorado Supreme Courts’ views that the proper inquiry looks at the tax scheme as a whole. The split emanates, at least in part, from courts’ disagreement about the proper application of Wynne.4 In Zilka’s petition for certiorari, she contended, among other things, that the Pennsylvania Supreme Court’s decision created a split between Pennsylvania and other states that aggregated state and local taxes based on the holding in Wynne. Specifically, Zilka noted in her petition:
The Pennsylvania Supreme Court’s ruling on this issue created a square and acknowledged state court conflict because it expressly rejected the West Virginia and Colorado Supreme Courts’ views that the proper inquiry looks at the tax scheme as a whole. The split emanates, at least in part, from courts’ disagreement about the proper application of Wynne.4
An amicus brief from the National Taxpayers Union Foundation supporting Zilka’s petition echoed this concern. Both Philadelphia and the U.S. solicitor general downplayed fears of uneven application of Wynne across state lines.
Since the U.S. Supreme Court declined to review Zilka, questions remain concerning whether there should be a distinction between state and local taxes when scrutinizing the constitutionality of the tax at issue. Some states may continue to apply Wynne differently than Pennsylvania.
This concern is readily visible in the context of the post-COVID trend toward flexibility, as hybrid or remote work has in many cases shifted the workforce from one taxing jurisdiction to another, sometimes from one state to another state. States generally impose an income tax on all of the income of the state’s residents but, provide in-state residents with a credit for taxes paid to other states while imposing their income tax on nonresidents only to the extent of income earned while working in the state — as seen in Wynne and Zilka.
Another approach is to tax workers only on income earned while working in the taxing jurisdiction. Wynne and Zilka demonstrate that issues can arise when taxing jurisdictions fail to provide residents adequate credits for taxes paid to other jurisdictions. These issues are exacerbated when states apply Wynne differently, i.e., when State A does not provide a credit for local taxes paid due to work in State B (as in Zilka), but State C does provide such a credit because State C aggregates the state and local taxes (as in Wynne).
An unintended consequence of the Supreme Court denying certiorari could be more litigation concerning whether a local tax should be treated as a state tax, and thereby aggregated under Wynne. Other states may follow Pennsylvania’s lead and distinguish between local taxes that are administered independently of state government with those local taxes that are clearly under the purview of the state.
Questions about the amount of control a locality exercises over local taxes could lead to surprising outcomes concerning when Wynne might apply, and disparate treatment of local taxes from state to state may exacerbate the apparent state split caused by Zilka. In contrast, had the Supreme Court decided the issue, taxpayers may have been able to apply one uniform approach to aggregating state and local taxes for credit purposes that would provide them assurance as to their tax obligations.
For now, taxpayers and practitioners must consider how courts in each state will react to Zilka.
This article was published on Law360.com
- Zilka v. Tax Review Board City of Philadelphia , 304 A.3d 1153 (Pa. 2023). ↩︎
- Comptroller of the Treasury v. Wynne , 575 U.S. 542 (2015). ↩︎
- Complete Auto Transit Inc. v. Brady , 430 U.S. 274, 279 (1977). ↩︎
- Petition for Writ of Certiorari at 13, Zilka v. Tax Rev. Bd. City of Philadelphia , No. 23-914, 2024 WL 778301 (Denial of cert. Jan. 13, 2025).
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