By Dan A. Schulder and Heidi Schwartz

The U.S. Supreme Court has declined to review a decision of the Pennsylvania Supreme Court that state income taxes paid to other states cannot be used to offset local income tax due.

Diane Zilka, the taxpayer, was a resident of Philadelphia who worked in Wilmington, Del. She was subject to four taxes:

• Philadelphia wage tax (3.922%)
• Pennsylvania personal income tax (3.07%)
• Wilmington earned income tax (1.25%)
• Delaware income tax (5%)

She was permitted a credit against the Delaware income tax for the Pennsylvania personal income tax that she paid, and therefore only owed 1.93% in Delaware income tax. The City of Philadelphia permitted a credit against Philadelphia wage tax for the Wilmington earned income tax she paid, leaving her with 2.672% owed to the City of Philadelphia. The taxpayer argued that she should be permitted an additional credit against Philadelphia wage tax for the Delaware income tax she paid.

The Philadelphia Tax Review Board denied the appeal on the grounds that the taxpayer was not subject to double taxation. Each lower court affirmed the stance of the Tax Review Board. The Pennsylvania Supreme Court affirmed on the grounds that the City of Philadelphia’s denial of a credit for out-of-state income tax paid did not violate the implicit prohibition of the U.S. Constitution (dormant Commerce Clause) against state legislation that excessively burdens interstate commerce because it did not amount to double taxation of the same income.¹

The key issue in Zilka v. Tax Review Board was whether state and local taxes should be aggregated when applying a Constitutional analysis to determine whether Philadelphia’s tax and credit system violates the dormant Commerce Clause of the U.S. Constitution. A majority of the Pennsylvania Supreme Court held that state and local taxes should not be aggregated for the purpose of that analysis. The Pennsylvania Supreme Court concluded that Philadelphia wage tax and the Delaware income tax were two separately enacted taxes that did not duplicate each other, with the Philadelphia wage tax enacted by Philadelphia’s City Council and collected by the Philadelphia Department of Revenue, while Wilmington’s income tax was enacted by Wilmington’s legislature and collected by the Delaware comptroller. In the majority’s view, the taxpayer chose to work in a jurisdiction with a higher tax rate, and Philadelphia is not responsible for the fact that Delaware charges a higher state income tax rate than Pennsylvania. Consequently, even after Philadelphia and Pennsylvania applied credits for corresponding income taxes paid to Wilmington and Delaware, respectively, the taxpayer’s income was subject to a higher income rate than other Philadelphia residents who worked in Pennsylvania because of tax disparities that exist between the taxing districts. It was not viewed as a discriminatory policy or practice. The resolution of this issue of aggregation was the issue for which certiorari was sought.

The question of whether aggregation is required turns on differing interpretations of Comptroller of Treasury of Md. v. Wynne, which held that a Maryland tax on residents’ income was unconstitutional under the dormant Commerce Clause because it was not internally consistent, where Maryland failed to permit a credit for similar taxes paid to out of sate jurisdictions.² The result was a double tax on a portion of Maryland residents’ income.

Whether or not state and local taxes should be aggregated for the purpose of applying credits is likely to continue to be litigated. Where state and local taxes are not aggregated, it often makes it more costly for residents to earn income in states other than their home state. The question is whether that effect is unconstitutional. The U.S. Supreme Court’s analysis in Wynne did not directly address the issue of aggregation, but there are portions of the analysis that suggest that the total tax burden of state and local taxes should be weighed in the internal consistency test, opposed to the separate state versus local burdens.

Courts in other states, such as West Virgina and Colorado, have interpreted Wynne more broadly than the Pennsylvania courts. The issue is likely to divide judges. As Pennsylvania Supreme Court Justice Wecht wrote in his concurrence in Zilka:

“Without some form of state-level aggregation, a state potentially could avoid providing full credits to its residents for taxes paid to other states on income earned in the other states by authorizing cities or political subdivisions to impose a portion of the tax directly . . . [a]nd allowing the result in any one case to hinge on whether a given tax is labeled state, local, county, city, or nonresident is reminiscent of the unworkable formalism that the [Supreme] Court’s modern dormant Commerce Clause cases have eschewed since Complete Auto.”

Until the U.S. Supreme Court takes up this aggregation issue, there will likely be a lack of consistency among states in applying the dormant Commerce Clause analysis to issues involving the application of credits between state and local taxes.

¹ Zilka v. Tax Review Board, City of Philadelphia, 304 A.3d 1153 (Pa. 2023).

² Comptroller of Treasury of Md. v. Wynne, 575 U.S. 542 (2015).

Dan A. Schulder is an equity partner at Cozen O’Connor in its Harrisburg, Pa., office. Schulder’s practice focuses on state and local tax matters. He can be reached at dschulder@cozen.com.

Heidi Schwartz is an associate in the Philadelphia office of Cozen O’Connor, with a focus on state and local tax matters. She can be reached at hschwartz@cozen.com.

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