Smith v. New Hampshire Dept. of Revenue Admin.

• Decision Date: 03 April 1997
• Docket Number: No. 95-852,95-852
• Citation: 692 A.2d 486,141 N.H. 681
• Parties: Ernest T. SMITH, III & a. v. NEW HAMPSHIRE DEPARTMENT OF REVENUE ADMINISTRATION and another.
• Court: New Hampshire Supreme Court

Page 486

692 A.2d 486

141 N.H. 681

Ernest T. SMITH, III & a. v. NEW HAMPSHIRE DEPARTMENT OF REVENUE ADMINISTRATION and another.

No. 95-852.

Supreme Court of New Hampshire.

April 3, 1997.

Sheehan Phinney Bass & Green, P.A., Manchester (James Q. Shirley, on the petitioners' initial and supplemental joint briefs and Michael C. Harvell, on the petitioners' supplemental joint brief), for petitioners Howard Nichols, Margery Nichols, and Margaret Straw.

McLane, Graf, Raulerson & Middleton, P.A., Manchester (Wilbur A. Glahn, III, orally and on the petitioners' initial and supplemental joint briefs and Steven M. Burke on the petitioners' supplemental joint brief), for petitioners John R. McLane, Jr. and Elisabeth D. McLane, trustees of the Virginia S. Deane Revocable Trust of 1985--the Education Trust; Robert A. Wells, executor of the estate of Helen L. Kendall; Alexander A. Courtney; and Mary E. Courtney.

Upton, Sanders & Smith, P.A., Concord (Russell F. Hilliard, orally and on the petitioners' initial and supplemental joint briefs and David E. Barradale, on the petitioners' initial and supplemental joint briefs), for petitioners Ernest T. Smith, III, Sandra A. Smith, and Robert P. Burroughs.

Wiggin & Nourie, P.A., Manchester (Mark Langan, on the petitioners' initial joint brief and John R. Monson, on the petitioners' supplemental joint brief), for petitioners Swenson A Trust, Swenson Marital Trust, and Swenson Family Trust.

Rath, Young and Pignatelli, P.A., Concord (William F.J. Ardinger, on the petitioners' supplemental joint brief), for petitioners.

Jeffrey R. Howard, Attorney General, V. Hummel Berghaus, IV, Revenue Counsel, orally and on the briefs, and Beth L. Fowler, Assistant Revenue Counsel, orally (Martin P. Honigberg, Senior Assistant Attorney General, Christopher P. Reid, Special Counsel), for defendants.

BROCK, Chief Justice.

This is an interlocutory appeal under Supreme Court Rule 9. The Superior Court (Manias, J.) transferred without ruling five questions:

1. Whether the New Hampshire Interest and Dividends Tax, levied pursuant to N.H.R.S.A. Ch. 77, discriminates amongst similarly situated taxpayers on the basis of the identity or situs of the payor of the taxpayer's investment income, in violation of the New Hampshire State Constitution, Part 1, Article 12.

2. Whether the New Hampshire Interest and Dividends Tax levied by N.H.R.S.A. Ch. 77 levies unreasonable or disproportional taxes upon similarly situated taxpayers on the basis of the identity or situs of the payor of the taxpayer's investment income, in violation of the New Hampshire State Constitution, Part 2, Article 5.

3. Whether the New Hampshire Interest and Dividends Tax, levied pursuant to N.H.R.S.A. Ch. 77, impermissibly classifies taxpayers on the basis of the identity or situs of the payor of the taxpayer's investment income rather than class of property, in violation of the New Hampshire State Constitution, Part 2, Article 6.

4. Whether the New Hampshire Interest and Dividends Tax, levied pursuant to N.H.R.S.A. Ch. 77, discriminates against interstate commerce in violation of the Commerce Clause of the United States Constitution because it taxes investment income earned from out-of-state payors while providing an exemption for investment income earned from certain instate payors.

5. Whether the New Hampshire Interest and Dividends Tax, levied pursuant to N.H.R.S.A. Ch. 77 discriminates amongst similarly situated taxpayers on the basis of the identity or situs of the payor of the taxpayer's investment income, in violation of the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution because it taxes investment income earned from out-of-state payors while providing an exemption for investment income earned from certain instate payors.

The trial court specifically did not transfer the issues of the appropriate remedy if the challenged tax is found to be unconstitutional and the constitutionality under the State and Federal Constitutions of the tax exemption for interest on State and municipal bond obligations.

The petitioners are New Hampshire residents who have earned interest and dividend income from various sources and have paid New Hampshire taxes on that income as required by RSA chapter 77 (1991 & Supp.1994), commonly referred to as the "Interest and Dividends Tax." They contend that two exemptions authorized under RSA chapter 77 during the 1991 through 1993 calendar years violated part I, article 12 and part II, articles 5 and 6 of the New Hampshire Constitution, and the commerce and equal protection clauses of the United States Constitution. The statute was amended effective January 1, 1995, to eliminate the exemptions at issue.

Pursuant to former RSA chapter 77, the State levied a tax on four classes of taxable property, two of which are at issue in this case. The first is "[i]nterest from bonds, notes, money at interest, and from all debts due the person to be taxed." RSA 77:4, I (1991). The second is "[d]ividends, other than stock dividends paid in new stock of the company issuing the same, on shares in all corporations and joint stock companies organized under the laws of any state, territory, or nation." RSA 77:4, II (1991).

Prior to 1995, the statute exempted from taxation certain income that would otherwise fit within the above definitions. The interest provision exempted interest from

deposits in any credit union, savings bank, building and loan association, or savings department of any loan and trust company or any national bank in this state or in those of any state which exempts from taxation the principal or income of deposits in such institutions in this State owned by residents of that state.

RSA 77:4, I. The dividend provision exempted dividends from "New Hampshire state banks, trust companies, building and loan associations, credit unions, or national banks." RSA 77:4, II.

Prior to oral argument before this court, the State withdrew its commerce clause defenses based upon the United States Supreme Court's recent decision in Fulton Corp. v. Faulkner, --- U.S. ----, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996). The State conceded that the exemptions formerly contained in RSA chapter 77 violated the commerce clause of the United States Constitution. The State's statement of the issues remaining in dispute provides:

The State has conceded that the former exemptions for (i) interest paid by New Hampshire depository institutions and (ii) dividends paid by a handful of New Hampshire stock banks violated the Commerce Clause, because they did not apply to income from similar out-of-state payors. Those who have been aggrieved by the Commerce Clause violation are entitled to seek "meaningful backward looking relief."

See McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 31, 110 S.Ct. 2238, 2247, 110 L.Ed.2d 17 (1990).

The parties, however, maintain different positions on the scope of the State's commerce clause concession and its impact on the remedy phase of this litigation. The petitioners contend that by conceding that former RSA chapter 77 violated the commerce clause by discriminating between interest and dividends earned from in-state banks and interest and dividends earned from out-of-state banks, the State must also concede that the commerce clause was violated by favoring New Hampshire bank interest and dividends over other types of investment income such as out-of-state corporate stock dividends and bond interest. The petitioners argue that the State's admission that the former exemptions affected interstate commerce applies to all out-of-state investments under the commerce clause.

The State concedes that to the extent it treated in-state and out-of-state bank interest and dividends differently, it violated the commerce clause. The State argues, however, that the commerce clause is not violated as to interest and dividends earned on out-of-state corporate sources because that income is taxed equally regardless of where the corporation is located. The State's position is that the scope of the commerce clause violation is the distinction between in-state and out-of-state activity within a specific class of property; namely, income received from depository banks.

I. State Constitution

The petitioners contend that former RSA chapter 77 violates the State Constitution "because it imposes a non-uniform, unequal, disproportionate, unreasonable and unfair tax burden." They further contend that "there can be no 'just reason' for a legislative tax classification that violates the commerce clause," and thus the State's commerce clause concession obviates the need for review under the New Hampshire Constitution. We disagree.

Disposition of the federal constitutional questions presented on this transfer is not dispositive of the State constitutional questions. See Opinion of the Justices, 114 N.H. 174, 179, 317 A.2d 568, 571 (1974) (concluding that classification of property for taxation was proper under State Constitution while refusing to opine on permissibility under Federal Constitution). Similarly, the State's withdrawal of its federal commerce clause defenses has no effect on our State analysis. The United States Constitution includes provisions governing the regulation and protection of interstate commerce, U.S. CONST. art. I, § 8, cl. 3, and ensuring that all persons are afforded equal protection under the laws, U.S. CONST. amend. XIV. The questions raised by the State constitutional challenge, however, concern the State's decision to classify, as taxable property, income based upon the classification of its payor, or the situs of the account, N.H. CONST. pt. II, art. 6. See Opinion of the Justices, 114 N.H. at 177-78, 317 A.2d at 570 (reviewing broad legislative prerogative to classify property). Although the legislative decision to treat New Hampshire and out-of-state sources of income differently concededly violates the commerce clause, we might...