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Steiner v. Utah State Tax Commission

Supreme Court of Utah

August 14, 2019

Robert C. Steiner and Wendy Steiner-Reed, Appellants and Cross-Appellees,
Utah State Tax Commission, Appellee and Cross-Appellant.

          On Direct Appeal, Third District, Salt Lake The Honorable Noel S. Hyde No. 170901774

          Peter W. Billings, William H. Adams, Nora K. Brunelle, David P. Billings, Salt Lake City, for appellants and cross-appellees

          Sean D. Reyes, Att'y Gen., Stanford E. Purser, Deputy Solic. Gen., Erin T. Middleton, Asst. Solic. Gen., John C. McCarrey, Mark E. Wainwright, Asst. Att'y Gens., Salt Lake City, for appellee and cross-appellant.

          Associate Chief Justice Lee authored the opinion of the Court, in which Chief Justice Durrant, Justice Himonas, Justice Pearce, and Justice Petersen joined.


          Lee Associate Chief Justice.

         ¶1 The Utah State Tax Commission disallowed certain tax deductions claimed by Robert and Wendy Steiner on their tax returns. The Steiners filed a challenge to that determination in the tax court. In that forum, the Steiners asserted that the United States Constitution, specifically the Dormant Commerce Clause and the Dormant Foreign Commerce Clause, [1] mandated that Utah allow their claimed deductions relating to (1) income earned in the United States but outside of Utah and (2) income earned in foreign countries. The Steiners also cited the Utah Code section 59-10-115(2), in support of their latter claim. The tax court agreed in part. It allowed the second set of deductions but disallowed the first.

         ¶2 Both parties appealed. We affirm in part and reverse in part. We agree with the State and hold that neither set of deductions is mandated by the United States Constitution. Nor are the deductions required by the Utah Tax Code.

         ¶3 Our constitutional analysis is in line with our 2015 decision in DIRECTV v. Utah State Tax Commission, 2015 UT 93, 364 P.3d 1036. There we noted the lack of any textual or originalist mooring for the doctrine that has built up around the concept of dormant commerce, while also lamenting the lack of any "clear, overarching theory" in the decisions of the United States Supreme Court in this field. Id. ¶ 45. We acknowledged, of course, our duty to follow controlling precedent from that court. But we emphasized the difficulty of "anticipat[ing] expansions of the law" in this field "into new territory" not yet explored by the Supreme Court. Id. And in the absence of clear direction (in text, history, or precedent), we declined to make a guess about the direction the case law might take in the next case that comes before the Supreme Court. Id.

         ¶4 We resolve this case on this basis. We find no controlling precedent from the United States Supreme Court that mandates a decision striking down the challenged Utah tax provisions on dormant commerce grounds. And we uphold their constitutionality on that basis.


         ¶5 The Steiners filed joint tax returns as Utah residents in tax years 2011, 2012, and 2013. Although their income included earnings from various sources, the only component at issue on appeal is the tax on business income earned by Robert Steiner (Steiner).

         ¶6 Steiner is a shareholder of Steiner, LLC, which is taxed as an S corporation.[2] He is also a beneficiary of the G.A. Steiner Trust (the Trust), which is the majority shareholder of Steiner, LLC. The Steiners' income from Steiner, LLC during the relevant period included both amounts passed directly to Steiner by virtue of his direct stake in Steiner, LLC and amounts attributable to Steiner as a beneficiary of the Trust.

         ¶7 Steiner, LLC is the sole shareholder of Alsco, Inc. Alsco is a textile rental business, which along with its subsidiaries does business in the United States and around the world. Alsco and all of its subsidiaries that do business in the United States have elected to be taxed as Qualified S Subsidiaries. Thus, all of the income derived from these entities is passed through to Steiner, LLC. Steiner, LLC, in turn, passes the income through to its individual shareholders, including Steiner. Such income is accordingly reflected on the Steiners' joint tax returns. Most of Alsco's foreign subsidiaries have elected to be taxed as partnerships for U.S. tax purposes. Ninety-nine percent of the income from each subsidiary is passed through to Alsco as a partner. This income goes through the same pass-through waterfall and ends up on the Steiners' joint tax returns as well.

         ¶8 On their federal tax returns during the relevant years the Steiners claimed, and received, a tax credit for the taxes they had paid to foreign jurisdictions. On their Utah tax returns, the Steiners claimed a state tax credit for taxes they paid to other states. These credits are explicitly allowed by the Utah Tax Code. Utah Code § 59-10-1003. But the Steiners also claimed an "equitable adjustment" under Utah Code section 59-10-115-an adjustment excluding foreign income from their Utah taxable income.

         ¶9 The Utah State Tax Commission[3] audited the Steiners' tax returns. The Commission disallowed the "equitable adjustment" for foreign income. But it also recalculated the state tax credit and determined that the Steiners were entitled to a larger credit than they had claimed.

         ¶10 The Steiners filed a Petition for Redetermination challenging the Commission's disallowance of the equitable adjustment for foreign income. In a subsequent amendment to their petition, the Steiners also challenged Utah's state tax credit system. They asked the Commission to make a determination that only the portion of Steiner, LLC's income that is apportioned to Utah should be included in taxable income for Utah purposes.[4] The Steiners also raised constitutional challenges to Utah's tax scheme in their petition.

         ¶11 The Commission conducted a formal hearing on the Steiners' petition and later issued a final decision in which it upheld the original audit determination and denied the Steiners' new apportionment claim. The Commission lacked jurisdiction to hear the constitutional claims and thus declined to address them.

         ¶12 After this adverse ruling, the Steiners paid the assessed tax deficiency (plus statutory interest) pursuant to Utah Code section 59-1-611. They then appealed to the third district tax court for a "de novo" review of the Commission's determination. See Utah Code § 59-1-601. In the tax court, both parties moved for summary judgment. The tax court first ruled that Utah's tax treatment of income earned in other states did not run afoul of the Dormant Commerce Clause. Specifically, the court held that the Dormant Commerce Clause did not require apportionment of the Steiners' income and that Utah's tax credit system satisfied the requirements of that clause. The court went on to rule that the Steiners were entitled to claim an equitable adjustment for their foreign business income. The court's ruling in this regard, although ultimately based on statutory grounds, was driven by constitutional concerns. In particular, the tax court believed that the Dormant Foreign Commerce Clause mandated that Utah allow foreign business income to be deducted. The tax court thus remanded the case to the Commission so it could apply the equitable adjustment to the Steiners' income. Both parties filed notices of appeal to this court pursuant to Utah Code section 59-1-608.


         ¶13 The Commerce Clause grants Congress the authority to regulate interstate commerce. U.S. Const. art. I, § 8, cl. 3. "By negative implication," the United States Supreme Court has held that "this provision also limits the states' authority in this realm." DIRECTV v. Utah State Tax Comm'n, 2015 UT 93, ¶ 13, 364 P.3d 1036. "So even if Congress has not spoken on an issue of interstate commerce, states are prevented from encroaching on Congress's authority-hence the term 'dormant' or 'negative' Commerce Clause." Id. We must decide how to apply this negative implication to the Utah Tax Code.

         ¶14 This case presents three distinct questions for our resolution: (1) whether the Dormant Commerce Clause requires Utah to apportion a residency-based income tax instead of simply granting a credit for taxes paid to other states; (2) whether the Dormant Foreign Commerce Clause requires Utah to allow a deduction for income earned in foreign countries; and (3) whether Utah's "equitable adjustment" statute, Utah Code section 59-10-115(2), mandates a deduction for foreign income.

         ¶15 We answer each of these questions in the negative, explaining our reasoning below. But before diving into the specifics, we lay out some background on our general jurisprudential approach to dormant commerce issues.


         ¶16 Decades ago the United States Supreme Court likened its case law under the Dormant Commerce Clause to a "quagmire." Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959). That was an apt metaphor at the time. It seems even more so today.

         ¶17 The Supreme Court's body of dormant commerce jurisprudence has multiplied several-fold in the decades since the Portland Cement case. But "[n]ot much has changed . . ., except perhaps to add more room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation." DIRECTV, 2015 UT 93, ¶ 44 (citation and internal quotation marks omitted). This is unfortunate. The lower courts are operating largely in the dark in this important field of constitutional law. "Yet we must of course decide the cases that come before us, mindful of our role as a lower court to follow controlling precedent from the U.S. Supreme Court." Id.

         ¶18 In carrying out our duty, however, "we are reluctant to extend dormant Commerce Clause precedent in new directions not yet endorsed" by the Supreme Court. Id. ¶ 45. Because the high court's rulings in this area have proceeded on an ad hoc basis lacking "any clear, overarching theory," we have noted the difficulty of the task of a lower court in attempting to "anticipate expansions of the law into new territory." Id. And with this in mind, we have warned of the perils of a lower court reading tea leaves in this field.

         ¶19 We have acknowledged, of course, the Supreme Court's prerogative to place limits on the "longstanding police powers of state and local governments to regulate business." Id. ¶ 46. But in light of the ad hoc nature of that court's precedents, we have warned that "it should be the U.S. Supreme Court" that leads the way in charting new territory in this field. Id.

         ¶20 We follow this same approach here. We will, of course, faithfully apply controlling precedent. But we decline to extend that precedent into new territory-even in ways that might seem logical in other jurisprudential realms. We do that not out of any disrespect for the United States Supreme Court, but in our best attempt at judicial humility in a constitutional field marked more by haphazard policy judgments than any unifying legal theory. In such a field it would seem presumptuous to make our own guess about the next move the high court might make as it extends its precedent. And we will thus leave it to that court to mark the next extension in this field.


         ¶21 Like many states, Utah taxes its residents on all of their income, regardless of where it is earned. But Utah also grants its residents credits for taxes they have already paid to other states. This ensures that Utah residents' income is not subject to taxation by both Utah and another state.

         ¶22 The Steiners nevertheless contend that this taxation scheme violates the Dormant Commerce Clause because it taxes a disproportionate share of the income they earned outside of Utah. They are mistaken. We hold that Utah's provision of credits for income taxes already paid to other states satisfies the dormant commerce requirements set forth in controlling precedent.[5]

         ¶23 The seminal case in this area is Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Complete Auto is the origin of the four-part test used to assess state taxes for compliance with the Dormant Commerce Clause. But the Complete Auto framework was altered by the Supreme Court's more recent decision in Comptroller of the Treasury of Maryland v. Wynne, 135 S.Ct. 1787 (2015). In light of the complexity of the case law in this area, we first outline the evolution of Dormant Commerce Clause jurisprudence prior to Wynne. ...

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