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Tuesday, February 17, 2004
Kerr v. Killian: Arizona Supreme Court Upholds Arizona Income Tax Scheme
Arizona taxpayers who were employed by the federal government and who paid state income taxes on mandatory contributions to federal retirement plans filed a class action against the Arizona Department of Revenue, alleging that the Arizona tax scheme violated the intergovernmental tax immunity doctrine codified in 4 U.S.C. Section 111(a). It challenged, among other things, the use in current A.R.S. Section 43-1001(2) of federal adjusted gross income as the base for Arizona taxable income because it allowed state employees whose contributions were "picked up" to avoid current taxation. Respondents argue that the tax scheme treats employee contributions of federal employees differently than those of state employees in violation of Section 111(a), because it does not similarly defer current taxation for employee contributions to federal retirement plans.
After a long and drawn-out procedural history, the case wound its way to the Supreme Court. The Court concluded that the Arizona tax scheme did not violate the intergovernmental tax immunity doctrine, because it neither contains overt discrimination against any taxpayer because of the source of pay, nor is it a subterfuge for discrimination against federal employees because of their source of pay, nor is Arizona's treatment of respondents' employee contributions a necessary consequence of their federal status. The difference in treatment did not result from who pays the employees, but the voluntary choice made by the employer as to whether the contributions should be "picked up." The Court vacated a contrary opinion of the court of appeals and reversed the judgment of the tax court and remanded on this issue.
Justice Hurwitz authored the Opinion; Chief Justice Jones, Vice Chief Justice McGregor, and Justices Berch and Ryan concurred.
Arizona taxpayers who were employed by the federal government and who paid state income taxes on mandatory contributions to federal retirement plans filed a class action against the Arizona Department of Revenue, alleging that the Arizona tax scheme violated the intergovernmental tax immunity doctrine codified in 4 U.S.C. Section 111(a). It challenged, among other things, the use in current A.R.S. Section 43-1001(2) of federal adjusted gross income as the base for Arizona taxable income because it allowed state employees whose contributions were "picked up" to avoid current taxation. Respondents argue that the tax scheme treats employee contributions of federal employees differently than those of state employees in violation of Section 111(a), because it does not similarly defer current taxation for employee contributions to federal retirement plans.
After a long and drawn-out procedural history, the case wound its way to the Supreme Court. The Court concluded that the Arizona tax scheme did not violate the intergovernmental tax immunity doctrine, because it neither contains overt discrimination against any taxpayer because of the source of pay, nor is it a subterfuge for discrimination against federal employees because of their source of pay, nor is Arizona's treatment of respondents' employee contributions a necessary consequence of their federal status. The difference in treatment did not result from who pays the employees, but the voluntary choice made by the employer as to whether the contributions should be "picked up." The Court vacated a contrary opinion of the court of appeals and reversed the judgment of the tax court and remanded on this issue.
Justice Hurwitz authored the Opinion; Chief Justice Jones, Vice Chief Justice McGregor, and Justices Berch and Ryan concurred.
Posted date: Tue, Feb 17, 2004
