In the Appeal of Mather, the California Office of Tax Appeals (OTA) held in a precedential opinion that New York City’s (NYC) Unincorporated Business Tax (UBT) was not a tax “imposed by and paid to another state,” as required to claim the Other State Tax Credit (OSTC), because New York State (NYS) did not require NYC to impose the UBT. The OTA also held that the NYS Metropolitan Commuter Transportation Mobility Tax (MCTMT) met the requirements to claim the OSTC, but that the taxpayers failed to substantiate the amount of their claim.
The taxpayers were California resident members of two limited liability companies (LLCs), headquartered in California and operating in multiple states, including NYS. The taxpayers were subject to both the UBT and the MCTMT based on their distributive share of the LLCs’ earnings. The primary issue before the OTA was whether the UBT and the MCTMT were eligible for the OSTC. To qualify for the OSTC, the taxes must be “imposed by and paid to another state” and must be considered “net income taxes.”
NYC Unincorporated Business Tax
The taxpayers contended the UBT should qualify for the OSTC because, despite being labeled a “city” tax, it was effectively imposed by NYS. They contended the NYS Constitution and enabling legislation required NYC to enact the UBT, making it a state-level tax. The taxpayers further argued NYC was merely an administrative agent acting on behalf of the state. The Franchise Tax Board (FTB) contended the UBT was a local levy, imposed and administered by NYC, not by NYS. As such, it was not a tax imposed by and paid to another state as required to claim the OSTC under California law. The OTA agreed with the FTB and held the UBT did not qualify for the OSTC. Although the NYS Legislature authorized the city to impose the tax, the OTA held NYC ultimately had discretion to impose the UBT. Moreover, the UBT was paid directly to NYC rather than NYS. Therefore, the UBT did not meet the statutory requirement of being “imposed by and paid to another state.”
NYS Metropolitan Commuter Transportation Mobility Tax
The taxpayers contended the MCTMT was a state-imposed tax under NYS law, with the revenue going to a state agency (the Metropolitan Transportation Authority). The FTB contended the MCTMT was not a state-level tax because it was a special-purpose levy benefitting a specific region (the Metropolitan Commuter Transportation District) rather than a general statewide tax. The OTA agreed with the taxpayers, holding the MCTMT is eligible for the OSTC because the MCTMT is a state-administered tax levied under NYS law and is paid directly to a state agency, thus meeting the criteria of a tax “imposed by and paid to another state.” The OTA also held the MCTMT qualified as a net income tax because it allowed deductions for return of capital and common ordinary and necessary business expenses. However, the OTA denied the taxpayers’ refund claim on the grounds they did not properly establish the amount of the MCTMT that could be claimed for the OSTC. Specifically, the OTA held the taxpayers did not perform an appropriate sourcing analysis using California’s single-sales factor formula and nonresident sourcing rules to determine the amount of income sourced to NYS. Instead, the taxpayers used NYS’s three-factor apportionment formula and sourcing rules. This discrepancy led the taxpayers to improperly compute the tax they would have paid to NYS for the MCTMT under California’s sourcing rules. As a result, the taxpayers were found to have failed to meet their burden of proving the amount of the OSTC.
The OTA denied petitions for rehearing filed by both parties.
Implications of the OTA’s Decision
The Appeal of Mather underscores the complexity of determining the eligibility of other state and local taxes for the OSTC under California law. It clarifies that, despite overlapping state oversight and local administration, the nature and characterization of the tax under the relevant state and local laws are critical in determining whether a tax is considered imposed by and paid to another state.
The issue of whether the Commerce Clause of the U.S. Constitution requires states to consider a taxpayer’s tax burden under a state tax scheme as a whole, including local tax liabilities, is currently pending before the U.S. Supreme Court in the Petition for Writ of Certiorari, Zilka v. Tax Rev. Bd., City of Phila. (No. 23-914).