Maine Denies Income Tax Credit for New Hampshire Business Taxes

In its August 2, 2018 decision, Goggin v. State Tax Assessor, 2018 ME 111, the Maine Supreme Judicial Court held that the Business and Consumer Court correctly denied Maine residents an individual income tax credit for the business taxes imposed by New Hampshire on income earned by GHK Company, LLC (GHK), a New Hampshire limited liability company owned in part by one of the spouses. GHK was classified as a partnership for federal and Maine income tax purposes, so income derived from its ownership was taxed by Maine on a pass-through basis as part of the adjusted gross income of the spouses. New Hampshire, however, imposes entity-level taxes on unincorporated companies, including LLCs. GHK paid these business taxes to New Hampshire for each of the years at issue. 

The court’s decision upholds a long-established Maine Revenue Services position that the credit provided by 36 M.R.S. § 5217-A for taxes imposed on Maine resident individuals is not available for taxes that are imposed by New Hampshire (or any other state) on a pass-through entity, rather than directly on the resident individual. 

The court rejected Petitioners’ argument that even if the credit was not required by statute, disallowing the credit resulted in an unconstitutional violation of the Commerce Clause under Comptroller of the Treasury v. Wynne, 135 S. Ct. 1787 (2015). The court held that Wynne did not apply to the facts at issue because, unlike in Wynne, the Goggin facts do not give rise to internal inconsistency. The court found that “[a]pplying the internal consistency test, if all states had Maine’s tax statutes—including its statutes regarding the taxation of pass-through entities—there would be no disproportionate taxation of out-of-state income.” Goggin, 2018 ME 111, ¶ 26. The issue in Goggin was caused by a mismatch between New Hampshire’s “unusual scheme” and Maine’s tax statutes, not a problem with the internal consistency of Maine’s tax statutes.

The court also rejected an argument that the failure to grant a credit violated the Constitution under the “external inconsistency” test, which it described as a test examining “‘the economic justification for the State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond that portion of value that is fairly attributable to economic activity within the taxing State.’” Goggin, 2018 ME 111, ¶ 28 (quoting Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995)). The court simply notes that this test has not been applied to individual income taxes, “likely because of the established legal principle that residence in a state and the consequent enjoyment of the protection of its laws provide a basis for the taxation of individuals’ income.” Goggin, 2018 ME 111, ¶ 28.

If you have any questions regarding this decision and its implications, or any other state tax-related issue, please contact Pierce Atwood partner Jonathan A. Block at 207.791.1173 or jblock@pierceatwood.com.