Robert C. Steiner and Wendy Steiner-Reed, Appellants and Cross-Appellees,
Utah State Tax Commission, Appellee and Cross-Appellant.
Direct Appeal, Third District, Salt Lake The Honorable Noel
S. Hyde No. 170901774
W. Billings, William H. Adams, Nora K. Brunelle, David P.
Billings, Salt Lake City, for appellants and cross-appellees
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.
Associate Chief Justice.
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,
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.
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.
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.
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.
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 is a shareholder of Steiner, LLC, which is taxed as
an S corporation. 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
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
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
The Utah State Tax Commission 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.
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. The Steiners also raised
constitutional challenges to Utah's tax scheme in their
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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. ...