Aronson v. Com.

• Decision Date: 14 December 1987
• Parties: Rachel ARONSON 1 v. COMMONWEALTH.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 137

516 N.E.2d 137

401 Mass. 244

Rachel ARONSON ¹ v. COMMONWEALTH.

Supreme Judicial Court of Massachusetts Hampden.

Argued Feb. 5, 1987.

Decided Dec. 14, 1987.

Robert Aronson, Springfield, for plaintiff.

Thomas A. Barnico, Asst. Atty. Gen., for Com.

Before WILKINS, LIACOS, ABRAMS, NOLAN and O'CONNOR, JJ.

O'CONNOR, Justice.

Under G.L. c. 62, §§ 2(b ) and 4 (1986 ed.), interest earned by Massachusetts residents on money deposited in non-Massachusetts financial institutions is taxed at the rate of ten per cent, while interest earned on money deposited in Massachusetts financial institutions is generally taxed at a five per cent rate. ² , ³ Aronson alleges, and the Commonwealth concedes, that she was taxed at the higher rate on interest income earned in 1983 because her money was in a non-Massachusetts bank. The complaint requests a declaratory judgment that the tax differential is unconstitutional and, in addition, an order requiring the refund of any tax collected unlawfully. In the trial court, the plaintiff sought leave to maintain the action as a class action on behalf of all residents of the Commonwealth who have paid the higher rate on interest earned from non-Massachusetts financial institutions. There has been no ruling on the request for class certification.

Both parties moved for summary judgment. Aronson's motion was unaccompanied by affidavits or other supporting materials. The Commonwealth's motion was supported by two affidavits of State officials generally asserting audit, verification, and collection problems associated with non-Massachusetts income earned by Massachusetts residents. We discuss those affidavits more fully below. A judge denied Aronson's motion and allowed the Commonwealth's motion. The judge concluded that the differential tax rates do not violate the equal protection, due process, privileges and immunities, or commerce clauses of the United States Constitution or art. 44 of the Amendments to the Massachusetts Constitution. Aronson appealed and we granted her application for direct appellate review. We now affirm the denial of Aronson's summary judgment motion, but we reverse the judgment for the Commonwealth and remand the case to the Superior Court for further proceedings limited to the commerce clause claim.

On appeal, Aronson challenges the allowance of the Commonwealth's summary judgment motion and the denial of her own motion on the grounds that the tax violates the equal protection and commerce clauses of the United States Constitution and art. 44 of the Amendments to the Massachusetts Constitution. As a preliminary to discussion of these issues, we observe that the Commonwealth has not argued that we should decline to reach them due to Aronson's failure to exhaust administrative remedies. Furthermore, we recognize that this case raises important public questions which ought to be resolved. Polaroid Corp. v. Commissioner of Revenue, 393 Mass. 490, 491 n. 3, 472 N.E.2d 259 (1984). Andover Sav. Bank v. Commissioner of Revenue, 387 Mass. 229, 232-233, 439 N.E.2d 282 (1982). However, the Commonwealth has argued in a footnote to its brief, that the "[p]laintiff cannot assert the injury, if any, suffered by non-Massachusetts banks," citing Valley Forge Christian College v. Americans United for Separation of Church & State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982). There is no indication in the record that at the trial level the Commonwealth raised any question about the plaintiff's standing to challenge the constitutionality of the tax differential provided by G.L. c. 62, §§ 2(b) and 4. The Commonwealth is not entitled to raise that question for the first time on appeal. Lyon v. Bloomfield, 355 Mass. 738, 743, 247 N.E.2d 555 (1969). Henchey v. Cox, 348 Mass. 742, 747, 205 N.E.2d 715 (1965). In any event, a plaintiff who alleges that she has been forced to pay an unconstitutional tax alleges an injury personal to her, and she has "the right to test in court the questions of constitutionality and of injury." Luscomb v. Bowker, 334 Mass. 468, 475-476, 136 N.E.2d 192 (1956). See Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 320 n. 3, 97 S.Ct. 599, 602 n. 3, 50 L.Ed.2d 514 (1977).

We first consider whether the challenged tax violates the commerce clause of the United States Constitution. The commerce clause, art. 1, § 8, cl. 3, gives Congress the power "[t]o regulate Commerce with foreign Nations, and among the several States...." This explicit grant of power to Congress also serves as an implicit restraint on the power of the States to regulate interstate commerce. Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 35, 100 S.Ct. 2009, 2015, 64 L.Ed.2d 702 (1980). Once a State tax is subject to commerce clause scrutiny, it will be upheld only if it meets the four part test of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326 (1977): the tax (1) must be applied to an activity with a substantial nexus with the taxing State; (2) must be fairly apportioned; (3) may not discriminate against interstate commerce; and (4) must be fairly related to the services provided by the State.

Before the Brady test applies, however, the tax must have sufficient effect on interstate commerce to evoke commerce clause scrutiny. See Andover Sav. Bank v. Commissioner of Revenue, supra 387 Mass. at 248, 439 N.E.2d 282. Therefore, we must address that question first. Initially, we note that "[a]ll objects of interstate trade merit Commerce Clause protection; none is excluded by definition at the outset." Philadelphia v. New Jersey, 437 U.S. 617, 622, 98 S.Ct. 2531, 2534, 57 L.Ed.2d 475 (1978). In Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977), the Court held unconstitutional a State law that imposed a higher tax on securities transactions occuring outside the State than on most such transactions within the State. Implicit in the Court's decision was the notion that investment funds, including deposits in savings banks, are objects of commerce.

There can be no doubt that the commerce in savings deposits involved in this case is "interstate," since Massachusetts residents and out-of-State banks are involved. Furthermore, the fact that the tax is levied on taxpayers' income, rather than on the interstate transaction directly, is irrelevant. "The label by which a tax is known should not control the constitutional principles by which it is judged." George S. Carrington Co. v. State Tax Comm'n, 375 Mass. 549, 552 n. 3, 377 N.E.2d 950 (1978). See Maryland v. Louisiana, 451 U.S. 725, 756, 101 S.Ct. 2114, 2134, 68 L.Ed.2d 576 (1981); Dominion Nat'l Bank v. Olsen, 771 F.2d 108, 118 (6th Cir.1985) (Contie, J., concurring) ("the fact that the challenged tax is assessed against receipt of income in Tennessee rather than against an interstate transaction ... is irrelevant").

It is clear, then, that the challenged tax is a tax on interstate commerce. That leads us to inquire whether the impact of the tax rate differential on interstate commerce is more than minimal or speculative. Relying on Andover Sav. Bank v. Commissioner of Revenue, supra 387 Mass. at 245-250, 439 N.E.2d 282, the judge concluded that "[a]ny burden on interstate commerce is too speculative to evoke the provision of the Commerce Clause." We agree with the principle that the burden on interstate commerce imposed by a particular tax may be so speculative that the commerce clause is not implicated. However, the tax in question is not such a tax.

Andover Sav. Bank v. Commissioner of Revenue, supra, involved a State law that allowed banks, when computing the deposits portion of a bank excise tax, to deduct the unpaid balance on loans secured by real estate taxable in Massachusetts or by certain real estate in contiguous States, but not loans secured by other real estate. The banks asserted that this geographical limitation discouraged local banks from lending in other States, thus discriminating against interstate commerce. In discussing whether the tax unlawfully protected local borrowers at the expense of out-of-State borrowers, this court noted that any burden on out-of-State borrowers was too speculative to evoke the prohibitions of the commerce clause. We reasoned that the deposits tax involved in that case appeared to be too insignificant to discourage out-of-State lending by Massachusetts banks, and that, even if it did discourage such lending, out-of-State lenders would probably fill any gap left by Massachusetts banks. Id. at 248, 439 N.E.2d 282.

The circumstances in Andover were significantly different from those in the present case. Therefore, the analysis in Andover is inappropriate here. Unlike in Andover, the doubling of the tax rate solely because of the location of the taxpayer's deposits, challenged in this case, clearly has a protectionist effect in favor of local financial institutions. "Such a large tax penalty ... cannot be deemed to have no practical effect on interstate commerce" (footnote omitted). Boston Stock Exch. v. State Tax Comm'n, supra 429 U.S. at 334, 97 S.Ct. at 609. Therefore, commerce clause scrutiny is required, and we turn to the four-part test set forth in Complete Auto Transit, Inc. v. Brady, supra 430 U.S. at 279, 97 S.Ct. at 1079.

Aronson focuses, as do we, on the third part of that test--the requirement that taxes must not discriminate against interstate commerce. "The principal objects of dormant Commerce Clause scrutiny are statutes that discriminate against interstate commerce." CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 107 S.Ct. 1637, 1648, 95 L.Ed.2d 67 (1987). The Supreme Court has repeatedly struck down State statutes that have "encouraged the development of local industry by means of taxing measures that imposed greater burdens on economic activities taking place outside the State than were placed on similar activities within the State." Westinghouse...