Zilka, D., Aplt. v. Tax Review Bd. City of Phila.

• Court: Supreme Court of Pennsylvania
• Decided: November 22, 2023
• Docket: 21 EAP 2022
• Status: Published

Opinion

[J-5A-B-2023] IN THE SUPREME COURT OF PENNSYLVANIA EASTERN DISTRICT

TODD, C.J., DONOHUE, DOUGHERTY, WECHT, MUNDY, BROBSON, JJ.

DIANE ZILKA, : No. 20 EAP 2022 : Appellant : Appeal from the Order of the : Commonwealth Court entered on : January 7, 2022, at No. 1063 CD v. : 2019 affirming the Order entered on : June 26, 2019, in the Court of : Common Pleas, Philadelphia TAX REVIEW BOARD CITY OF : County, Civil Division at Nos. 02438 PHILADELPHIA, : and 02439, October Term 2018. : Appellee : ARGUED: March 7, 2023

DIANE ZILKA, : No. 21 EAP 2022 : Appellant : Appeal from the Order of the : Commonwealth Court entered on : January 7, 2022, at No. 1064 CD v. : 2019 affirming the Order entered on : June 26, 2019, in the Court of : Common Pleas, Philadelphia TAX REVIEW BOARD CITY OF : County, Civil Division at Nos. 02438 PHILADELPHIA, : and 02439, October Term 2018. : Appellee : ARGUED: March 7, 2023

OPINION

CHIEF JUSTICE TODD DECIDED: NOVEMBER 22, 2023 In this appeal by allowance, we consider whether the City of Philadelphia (the

“City” or “Philadelphia”) unconstitutionally discriminated against interstate commerce by

subjecting a Philadelphia resident who worked exclusively out of state to its wage tax (the

“Philadelphia Tax”), and allowing her credit against that tax only for the local income tax she paid to another jurisdiction, while declining to afford her additional credit for the out-

of-state income tax she paid. In conjunction with this overarching issue, we must

determine whether, for purposes of the dormant Commerce Clause analysis implicated

herein, state and local taxes must be considered in the aggregate. For the reasons that

follow, we conclude that state and local taxes need not be aggregated in conducting a

dormant Commerce Clause analysis, and that, ultimately, the City’s tax scheme does not

discriminate against interstate commerce. Accordingly, we affirm the order of the

Commonwealth Court.

I. Introduction: The Commerce Clause

By way of background, the Commerce Clause provides that “Congress shall have

Power . . . To regulate Commerce . . . among the several States.” U.S. Const. art. 1, § 8,

cl. 3 (first ellipses original). While the Commerce Clause is an express grant of power to

Congress, the United States Supreme Court has consistently held that the language also

contains a “negative command, known as the dormant Commerce Clause,” which

prohibits “certain state taxation even when Congress has failed to legislate on the

subject.” Comptroller of Treasury of Md. v. Wynne, 575 U.S. 542, 549 (2015) (quoting

Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 179 (1995)). Notably, the high

Court has explained that the crux of the dormant Commerce Clause is that a state “may

not tax a transaction or incident more heavily when it crosses state lines than when it

occurs entirely within the State,” id. (quoting Armco Inc. v. Hardesty, 467 U.S. 638, 642

(1984)), nor may it “impose a tax which discriminates against interstate commerce either

by providing a direct commercial advantage to local business, or by subjecting interstate

commerce to the burden of ‘multiple taxation,’” id. at 549-50 (quoting Nw. States Portland

Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959)). However, where alleged taxation

disparities stem from the combined effect of two otherwise lawful income tax schemes,

[J-5A-B-2023] - 2 the Court has manifestly determined that there is no discrimination against interstate

commerce. See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 279 (1978) (observing that

“[t]he prevention of duplicative taxation[] . . . would require national uniform rules for the

division of income,” which is a task solely in the province of Congress).

Significantly, in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the high

Court crafted a four-part test for determining whether a state or local tax unconstitutionally

burdens interstate commerce. Under this test, a tax does not violate the dormant

Commerce Clause if it: (1) is applied to an activity with a substantial nexus to the taxing

state; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and

(4) is fairly related to the services provided by the state.1 Id. at 279. Relevant to the

instant appeal, to determine whether a tax is fairly apportioned, a court must assess

whether the tax is internally and externally consistent. The high Court has explained that

internal consistency is met “when the imposition of a tax identical to the one in question

by every other State would add no burden to interstate commerce that intrastate

commerce would not also bear.” Jefferson Lines, 514 U.S. at 185. Conversely, an

internally inconsistent tax demonstrates that a state “is attempting to take more than its

fair share of taxes from the interstate transaction, since allowing such a tax in one State

would place interstate commerce at the mercy of those remaining States that might

impose an identical tax.” Id. (citation omitted). As for external consistency, a court must

examine “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.” Id. (citation omitted).

1 Presently, Appellant contends that the Philadelphia Tax violates the fair apportionment

and discrimination prongs of the Complete Auto test.

[J-5A-B-2023] - 3 Relevant to the instant appeal, in 2015, the high Court grappled with these issues

in Wynne, supra. Therein, the Court examined Maryland’s tax scheme, under which

Maryland required its residents to pay a “state” income tax which was set at a graduated

rate, and a “county” income tax, the rate of which varied by county for wages earned both

in and out of state, and additionally imposed upon nonresidents a “special nonresident”

tax on their income earned in Maryland. Wynne, 575 U.S. at 545-46. While Maryland

allowed residents who earned income out of state a credit against the state tax, it did not

permit them any credit against the county tax. Id. at 546. Critically, the high Court

determined that, “[d]espite the names that Maryland ha[d] assigned to these taxes, both

[were] State taxes,” noting that “both [were] collected by the State’s Comptroller of the

Treasury.” Id. (citation omitted).

Turning to Complete Auto, the Wynne Court observed that the internal consistency

test “allows courts to isolate the effect of a defendant State’s tax scheme” by

“hypothetically assuming that every State has the same tax structure.” Wynne, 575 U.S.

at 562. In this vein, the Court explained that the internal consistency test permits courts

to distinguish between “tax schemes that inherently discriminate against interstate

commerce without regard to the tax policies of other States,” and “tax schemes that create

disparate incentives to engage in interstate commerce (and sometimes result in double

taxation) only as a result of the interaction of two different but nondiscriminatory and

internally consistent schemes,” emphasizing that the former category of taxes are

generally unconstitutional, while the latter are not. Id. (citing, inter alia, Armco Inc., 467

U.S. at 645-46; Moorman Mfg. Co., 437 U.S. at 277 n.12).

Ultimately, bearing in mind these principles, the Court found that Maryland’s county

tax was unconstitutional because Maryland failed to permit residents a credit for similar

taxes paid to out-of-state jurisdictions, thus resulting in double taxation on a portion of

[J-5A-B-2023] - 4 residents’ income. Indeed, applying the internal consistency test to Maryland’s tax

scheme, the Court assumed that all states adopted the following taxes, consistent with

Maryland’s county and special nonresident taxes: “(1) a 1.25% tax on income that

residents earn in State, (2) a 1.25% tax on income that residents earn in other

jurisdictions, and (3) a 1.25% tax on income that nonresidents earn in State.”2 Id. at 564-

65. The Court observed that, under this scenario, an in-state resident and an out-of-state

resident would incur disparate tax obligations:

Assume . . . that two taxpayers, April and Bob, both live in State A, but that April earns her income in State A whereas Bob earns his income in State B. In this circumstance, Bob will pay more income tax than April solely because he earns income interstate. Specifically, April will have to pay a 1.25% tax only once, to State A. But Bob will have to pay a 1.25% tax twice: once to State A, where he resides, and once to State B, where he earns the income. Id. at 565. Based on this analysis, the Court concluded that Maryland’s tax scheme was

unconstitutional, as the disparate treatment of interstate commerce emanating therefrom

was “not simply the result of [the tax scheme’s] interaction with the taxing schemes of

other States,” but, rather, stemmed from inherent discrimination contained within the

scheme. Id. (citations omitted).

Aptly, the Court stressed that “Maryland could remedy the infirmity in its tax

scheme by offering, as most States do, a credit against income taxes paid to other

States,” which would vindicate the tax scheme under the internal consistency test. Id. at

568 (citation omitted). Illustrating this point, the Court tweaked the above hypothetical

scenario to assume that all states impose those same taxes but also allow a credit against

income taxes paid by residents to other jurisdictions. Under such circumstances, the

2 The Court appears to have used the 1.25% rate for all three taxes simply for ease of

applying the internal consistency test, as the rate is not reflective of the actual rates of Maryland’s relevant taxes.

[J-5A-B-2023] - 5 Court noted that “April (who lives and works in State A) and Bob (who lives in State A but

works in State B) would pay the same tax,” observing that “April would pay a 1.25% tax

only once (to State A), and Bob would pay a 1.25% tax only once (to State B, because

State A would give him a credit against the tax he paid to State B).” Id. However, as

Maryland offered no such credit against its county tax, the Court declared the tax scheme

unconstitutional.

II. Factual and Procedural Background

With that backdrop, we now turn to the facts of this appeal. In April 2017 and June

2017, Appellant Diane Zilka filed petitions with the City’s Department of Revenue (the

“Department”), seeking refunds for the Philadelphia Tax she paid from 2013 to 2015, and

in 2016, respectively.3 During the relevant tax years, Appellant resided in the City, but

worked exclusively in Wilmington, Delaware. Thus, she was subject to four income taxes

(and tax rates) during that time: the Philadelphia Tax (3.922%); the Pennsylvania Income

Tax (“PIT”) (3.07%); the Wilmington Earned Income Tax (“Wilmington Tax”) (1.25%); and

the Delaware Income Tax (“DIT”) (5%).4 The Commonwealth granted Appellant credit for

her DIT liability to completely offset the PIT she paid for the tax years 2013 through 2016;

because of the respective tax rates in our Commonwealth versus the State of Delaware,

after this offsetting, Appellant paid the remaining 1.93% in DIT. Although the City similarly

credited against Appellant’s Philadelphia Tax liability the amount she paid in the

Wilmington Tax — specifically, the City credited Appellant 1.25% against her Philadelphia

Tax liability of 3.922%, leaving her with a remainder of 2.672% owed to the City —

3 While Appellant filed two separate refund petitions, for ease of reference, we will simply

refer to her request for refunds singularly, as the resolution of each petition hinges upon the same issue. 4 Herein, we will employ the figures utilized by the Commonwealth Court below, which

represent the tax rates of the 2014 tax year.

[J-5A-B-2023] - 6 Appellant claimed that the City was required to afford her an additional credit of 1.93%

against the Philadelphia Tax, representing the remainder of the DIT she owed after the

Commonwealth credited Appellant for her PIT.

After the City refused to permit her this credit against her Philadelphia Tax liability,

Appellant appealed to the City’s Tax Review Board (the “Board”). Following two hearings

on the matter, the Board denied Appellant’s refund request. Appellant then appealed to

the trial court, which affirmed the decision of the Board without taking additional evidence.

Thereafter, Appellant appealed to the Commonwealth Court, renewing her claim

that she was owed a credit against the Philadelphia Tax for the portion of her DIT liability

which was not offset/credited against her PIT. Appellant suggested that the failure to

grant her this credit amounted to double taxation in violation of the Commerce Clause.

More specifically, Appellant asserted that, because the City failed to offset her

Philadelphia Tax with the remainder of her DIT liability, the tax scheme failed the

Complete Auto test. In that regard, Appellant contended that: (1) the tax is not fairly

apportioned, as it lacks a mechanism to mitigate the risk of duplicative taxation for income

earned from interstate commerce, thus failing to meet the internal and external

consistency tests; and (2) the City’s partial credit practice discriminatorily forces her to

pay more in taxes than her intrastate counterparts. Notably, in support of her claim,

Appellant relied heavily on Wynne, supra, contending that the high Court’s decision

requires state and local taxes to be considered as one.

In a unanimous, unpublished memorandum opinion authored by Judge Michael H.

Wojcik, the Commonwealth Court affirmed. Zilka v. Tax Rev. Bd. City of Phila., 1063-

1064 C.D. 2019 (Pa. Cmwlth. filed Jan. 7, 2022) (en banc). In so doing, the court

concluded that Appellant was not subject to double taxation in violation of the Commerce

Clause, as she never paid more than one local and one state tax at a time. From the

[J-5A-B-2023] - 7 court’s perspective, the City taxed Appellant at the same rate (3.922%) as it taxed other

residents who worked in Pennsylvania, and she paid 1.93% more in taxes than her

intrastate counterparts only because she chose to work in Delaware, which charges a

higher income tax than Pennsylvania. Indeed, the court highlighted that the City credited

Appellant the full amount of her Wilmington Tax liability to offset the Philadelphia Tax she

incurred, while declining to apply tax credit for the balance of the DIT which remained

“unused” after offsetting the PIT (namely, 1.93%). The court emphasized that, in its view,

the City’s decision not to apply the remainder of Appellant’s DIT to offset her Philadelphia

Tax simply did not amount to double taxation.

Nevertheless, assuming that there was a risk of double taxation, the court analyzed

the City’s taxation scheme under the Complete Auto test. First, focusing on the “fair

apportionment” prong of the test, the court determined that the Philadelphia Tax is

internally consistent, as “all individuals earning income outside of their home locality

would receive a credit for income taxes paid to the foreign locality and would pay no more

than their intrastate counterpart” if the wage tax were imposed in every jurisdiction. Id. at

8. Likewise, the court found that the Philadelphia Tax meets the external consistency

test, explaining that the tax “reasonably reflects how and where [Appellant’s] income is

generated,” and “is not taxing all of [Appellant’s] income regardless of source.” Id. at 9.

In that vein, the court opined that the City “fairly apportions the tax according to its relation

to the income by providing a credit for the tax owed to Wilmington,” such that the City

never taxed more than its fair share of Appellant’s wages. Id. Relatedly, the court

reasoned that “Philadelphia’s provision of municipal benefits and services to its residents

provides sufficient economic justification for the imposition of [the Philadelphia Tax].” Id.

(citing Lawrence v. State Tax Comm’n of Miss., 286 U.S. 276, 279 (1932) (observing that

“domicile in itself establishes a basis for taxation,” as “[e]njoyment of the privileges of

[J-5A-B-2023] - 8 residence within the state, and the attendant right to invoke the protection of its laws, are

inseparable from the responsibility for sharing the costs of government”)).

Next, turning to the “discrimination” prong of the Complete Auto test, the court

highlighted that the City taxes all of its residents’ income at the rate of 3.922% and fully

credits any similar taxes a resident paid to another jurisdiction. To that end, the court

noted that, here, because Appellant’s income was taxed at 1.25% by Wilmington, the City

applied 1.25% credit toward her Philadelphia Tax. Thus, the court found that Appellant

did not pay double taxes on her income; instead, the court determined, she paid the same

3.922% rate as all of the City’s residents, with the only difference being that the City

“receiv[ed] only 2.67%, while Wilmington . . . receiv[ed] 1.25%.” Id. at 10.

Finally, the court found that “Wynne does not compel Philadelphia to apply an

additional credit for any dissimilar taxes, such as the [DIT]. . . .” Id. at 13. From the court’s

perspective, “[a]lthough the Wynne Court held that Maryland was required to offset its so-

called ‘county’ tax against other ‘state’ taxes, the ‘county’ tax was actually a state tax

because it was administered, adopted, mandated, and collected by the state.” Id.

Conversely, the court emphasized that, here, “both the [Philadelphia Tax] and Wilmington

Tax are municipal taxes.” Id. On that basis, the court opined that Appellant’s taxes were

appropriately credited in an “apples to apples” manner — with Delaware’s state tax

offsetting Pennsylvania’s state tax and Wilmington’s municipal tax offsetting the City’s

municipal tax. This approach, in the court’s view, comported with the high Court’s holding

in Wynne, and, moreover, passed constitutional muster. Thus, reiterating that the

taxation of Appellant’s income in excess of the taxation of her intrastate cohorts stemmed

solely from her decision to work in Delaware, which has a higher rate of taxation than

Pennsylvania — and not from the City’s tax scheme — the court found that Appellant was

not subject to double taxation. Accordingly, the court affirmed the trial court’s decision.

[J-5A-B-2023] - 9 Appellant subsequently filed a petition for allowance of appeal with our Court, and

we granted review to consider whether the City, in declining to apply the remainder of

Appellant’s DIT liability to offset her Philadelphia Tax liability, discriminated against

interstate commerce in violation of the dormant Commerce Clause.5 As illuminated by

the parties’ arguments, this question necessarily requires us to determine whether state

and local taxes are indistinguishable when analyzing a challenged tax scheme under the

dormant Commerce Clause.

III. Arguments

Regarding that prefatory issue, Appellant initially contends that state and local

income tax burdens must be aggregated in reviewing a dormant Commerce Clause

challenge, in essence, maintaining that local or municipal taxes, such as the Philadelphia

Tax, are indistinguishable from state taxes because political subdivisions are creatures

of the state. According to Appellant, in Associated Industries of Missouri v. Lohman, 511

5 The question, as phrased by Appellant, reads:

[Appellant], a Philadelphia resident who worked in Wilmington, Delaware, was subject to [the PIT, the Philadelphia Tax, the DIT, and the Wilmington Tax]. Pennsylvania allowed [Appellant] to credit [the] DIT paid against her PIT liability. The City . . . allowed [Appellant] to credit [the] Wilmington Tax paid against her [Philadelphia Tax] liability. [The] DIT [which Appellant] paid exceeded the PIT credit she was allowed (“Unapplied Credit”). The City did not allow [Appellant] to apply the Unapplied Credit against the [Philadelphia] Tax. The U.S. Supreme Court held the Commerce Clause of the U.S. Constitution dictates that taxing jurisdictions must grant their residents a credit for state and local income taxes paid to other state and local taxing jurisdictions. [Wynne, supra]. Did the Commonwealth Court err, as a matter of law, where it held it was constitutional for the City not to apply [Appellant’s] Unapplied Credit against her [Philadelphia] Tax liability? Zilka v. Tax Rev. Bd. City of Phila., 281 A.3d 1029 (Pa. 2022) (order).

[J-5A-B-2023] - 10 U.S. 641 (1994) (holding that Missouri’s use tax scheme impermissibly discriminated

against interstate commerce in certain localities in which the use tax exceeded the sales

tax), the United States Supreme Court endorsed the notion that federal constitutional

restraints on state and local taxation of cross-border economic activity must be evaluated

in light of the state’s tax scheme in its entirety. Appellant asserts that, more recently, in

Wynne, the high Court made no distinction between state and local taxes, as it determined

that, “[i]n applying the dormant Commerce Clause, they must be considered as one.”

Appellant’s Brief at 13 (emphasis omitted) (quoting Wynne, 575 U.S. at 564 n.8).

Relatedly, Appellant proffers that appellate courts in West Virginia, Colorado, and

Arizona have found that state and local tax schemes must be considered in tandem under

the Commerce Clause. Appellant notes that the West Virginia Supreme Court invalidated

a tax scheme in which the state failed to grant credit against its state-level use tax for

local sales taxes paid out of state. See Matkovich v. CSX Transp. Inc., 793 S.E.2d 888

(W. Va. 2016). Appellant highlights that, in doing so, the Matkovich court “evaluated all

of the taxes at issue at the state level – regardless of whether they were imposed by a

state or locality.” Appellant’s Brief at 14. Similarly, Appellant posits that, in General

Motors Corp. v. City & County of Denver, 990 P.2d 59 (Colo. 1999), the Colorado

Supreme Court invalidated a Denver tax scheme which did not provide credit for sales

and use taxes paid to other states and their subdivisions. Appellant stresses that, in

deeming the tax scheme unconstitutional, the General Motors court explained: “Internal

consistency requires that states impose identical taxes when viewed in the aggregate –

as a collection of the state and sub-state taxing jurisdictions. In other words, the interstate

taxpayers should never pay more sales or use tax than the intrastate taxpayer.” Id. at 69.

Appellant also suggests that Arizona Department of Revenue v. Arizona Public Service

Co., 934 P.2d 796 (Ariz. Ct. App. 1997), supports her position that state and local taxes

[J-5A-B-2023] - 11 must be considered together, as, therein, the Arizona Court of Appeals held that “[t]he

derivative relationship between a state and its counties means that when a county

imposes a tax, it does so pursuant to a delegation of state tax authority.” Id. at 799.

Moreover, Appellant submits that our Court’s jurisprudence supports her

construction of the dormant Commerce Clause and the need to aggregate state and local

taxes thereunder. In that regard, Appellant cites to Philadelphia Eagles Football Club,

Inc. v. City of Philadelphia, 823 A.2d 108 (Pa. 2003) (OAJC) (“Philadelphia Eagles”), and,

with little additional analysis, claims that, in that case, we required “[a]pportionment of a

local tax . . . as a result of the state taxes in the other states to which the [Philadelphia

Eagles] [t]eam was subject.” Appellant’s Brief at 16 (emphasis omitted). Appellant

similarly avers that, in Northwood Construction Co. v. Township of Upper Moreland, 856

A.2d 789 (Pa. 2004), we “held that the Commerce Clause mandated that the Township

of Upper Moreland . . . apportion the taxpayer’s receipts derived from its Maryland,

Delaware, and New Jersey construction activities,” requiring apportionment for “state

taxes, not any local tax.” Appellant’s Brief at 16-17. Additionally, Appellant contends that

the Commonwealth Court endorsed an analysis which relates local tax to state tax in

Upper Moreland Township v. 7-Eleven, Inc., 160 A.3d 921 (Pa. Cmwlth. 2017), wherein

the intermediate court “held that the Commerce Clause mandated that the [t]ownship

apportion the taxpayer’s receipts derived from its Pennsylvania franchisees because

much of the activities supporting the Pennsylvania franchisees were performed in Texas,

the company’s headquarters, or elsewhere outside of Pennsylvania.” Appellant’s Brief at

17. According to Appellant, these three cases demonstrate that our Court and the lower

court “have consistently recognized that a Commerce Clause analysis must examine the

local tax as it relates to the state tax.” Id. at 17 (emphasis original).

[J-5A-B-2023] - 12 Appellant next argues that “Philadelphia is part of Pennsylvania and is subject to

the laws and restrictions imposed upon it by Pennsylvania.” Id. at 19. To that end,

Appellant observes that, “unless authorized by state statute, Philadelphia does not have

the power to impose any tax.” Id. (emphasis omitted). Indeed, Appellant asserts that,

because the City derives its authority to impose taxes by way of state statute,6 its “ability

to assess and collect any tax, including the [Philadelphia] Tax, is at the absolute behest

of Pennsylvania.” Id. at 20. Thus, Appellant insists that we must examine the state and

6 Appellant notes that the City obtained its right to self-governance via the First Class City

Home Rule Act, 53 P.S. § 13101 et seq., which precludes the City from enacting taxes without an express grant of authority from the General Assembly, see id. § 13133(a)(8). Appellant further explains that the City procured the right to impose the Philadelphia Tax by way of the Sterling Act, id. § 15971, which provides, in relevant part: From and after the effective date of this act, the council of any city of the first class shall have the authority by ordinance, for general revenue purposes, to levy, assess and collect, or provide for the levying, assessment and collection of, such taxes on persons, transactions, occupations, privileges, subjects and personal property, within the limits of such city of the first class, as it shall determine, except that such council shall not have authority to levy, assess and collect, or provide for the levying, assessment and collection of, any tax on a privilege, transaction, subject or occupation, or on personal property, which is now or may hereafter become subject to a State tax or license fee. Id. Appellant also highlights that the General Assembly carved out a savings clause in the PIT, expressly permitting the City to impose the Philadelphia Tax: Notwithstanding anything contained in any law to the contrary, including but not limited to the provisions of . . . the Sterling Act, the validity of any ordinance or part of any ordinance or any resolution or part of any resolution, and any amendments or supplements thereto now or hereafter enacted or adopted by any political subdivision of this Commonwealth for or relating to the imposition, levy or collection of any tax, shall not be affected or impaired by anything contained in this article. . . . 72 P.S. § 7359(a) (internal footnote omitted).

[J-5A-B-2023] - 13 local tax burdens placed upon her simultaneously to determine whether the City violated

the dormant Commerce Clause in imposing upon her the Philadelphia Tax, while

declining to afford her credit against that tax for her DIT liability.

Pivoting to the Complete Auto test, Appellant avers that the City’s tax practice

discriminates against interstate commerce, renewing her contention that she has been

subject to double taxation, as her tax burden was 1.93% higher than her intrastate

counterparts. Appellant argues that the City’s “partial-credit practice,” as she phrases it,

discriminates against interstate commerce by imposing a tax burden on cross-border

activity which “exceeds the tax burden that [the City] imposes upon commercial activity

that takes place solely within Pennsylvania.” Id. at 30-31. In Appellant’s view, it matters

not that she chose to work in Delaware, rather than Pennsylvania, because taxpayers

who choose to work in Pennsylvania received a lower tax rate than she did. In this vein,

Appellant concludes that “any tax scheme which encourages a taxpayer to conduct

intrastate activities instead of interstate activities unconstitutionally burdens interstate

commerce.” Id. at 31 (citations omitted).

With respect to the fair apportionment prong of the Complete Auto test, Appellant

contends that the City’s tax practice fails “because it does not provide a mechanism to

mitigate the risk of duplicative taxation for income earned from interstate commerce,” thus

flouting “the constitutional restriction limiting a [state’s] taxing powers.” Id. at 33 (citation

omitted). In this regard, Appellant correctly acknowledges that, under the internal

consistency test, we must “assume that every state/local government enacts the same

tax regime,” and determine “whether such hypothetical harmonization imposes a greater

burden upon interstate commerce than is imposed upon intrastate commerce.” Id. at 36

(citing Goldberg v. Sweet, 488 U.S. 252, 261 (1989)). Nevertheless, instead of applying

the internal consistency test in this manner — i.e., assuming that all states and local

[J-5A-B-2023] - 14 jurisdictions adopt the same tax rates and tax crediting systems as the Commonwealth

and the City — Appellant merely hypothesizes that the taxing jurisdictions adopt the same

systems of providing credit, but maintain their own differing tax rates. In so doing,

Appellant opines that the City’s taxation scheme is internally inconsistent, proclaiming: “if

every [s]tate or locality adopted [the City’s] tax practice, interstate income would be

subjected to multiple taxation nationwide.” Id. at 38.

Appellant likewise avers that the City’s tax scheme is not externally consistent, as

the City taxed her income generated in Wilmington, despite the fact that she had

conducted no business in Philadelphia. In essence, Appellant asserts that she was taxed

merely because she lived in the City, with no legitimate nexus between her economic

activity conducted in Wilmington and the City to justify imposition of the Philadelphia Tax.

According to Appellant, “[i]t is clear that taxing Appellant’s income, where none of it is

earned in Philadelphia, is disproportionate to the business (or lack thereof) transacted by

Appellant in Philadelphia.” Id. at 40. Appellant suggests that Philadelphia Eagles,

Northwood Construction, and 7-Eleven establish that a locality may not impose a tax upon

100% of a taxpayer’s activity when such activity did not occur in that locality. While she

acknowledges that, here, the City granted a tax credit representing the Wilmington Tax,

Appellant contends that the City nonetheless “subject[ed] 69% of [her] income to [the

Philadelphia] Tax for work performed entirely outside of the state.” Id. at 43 (emphasis

omitted). Finally, Appellant discounts the Commonwealth Court’s conclusion that her

residency in the City is reason enough to justify imposition of the Philadelphia Tax,

arguing:

All states and localities, including Philadelphia, can meet the fair apportionment requirement by imposing taxes upon their residents the same way they tax their non-residents – by taxing only income generated in Philadelphia, and allowing other jurisdictions to impose their own taxes upon income generated elsewhere. Alternatively, states and localities can

[J-5A-B-2023] - 15 choose to tax all of their residents’ income regardless of where earned, but provide credits for income taxes paid elsewhere. But whichever system is chosen, it must be fair, and it must attempt to allocate the tax based upon where the economic activity occurs, [i.e.,] where the income is generated. [The City’s] practice makes no such effort. Id. at 45-46 (emphasis original). Appellant, thus, concludes that, “[w]hile [the City] may

have the jurisdiction to tax all of Appellant’s income, that does not mean its ability to do

so does not violate the Commerce Clause.” Id. at 47.7

The City counters by first emphasizing that, contrary to Appellant’s assertions, our

Court has, in the past, distinguished state taxes from local taxes. See McClelland v. City

of Pittsburgh, 57 A.2d 846, 848 (Pa. 1948) (“State taxes stand on a different basis from

local levies; the former are essential to the very ‘preservation’ of the state itself, while the

latter are authorized or permitted by the state, not for its actual preservation, but merely

to maintain the machinery of local government.” (citation and internal citation omitted));

Nat’l Biscuit v. City of Phila., 98 A.2d 182, 186-87 (Pa. 1953) (finding that a tax

administered entirely for the benefit of a municipality was not a state tax, but a local tax);

7 The American College of Tax Counsel (“ACTC”) submitted an amicus brief in support of

Appellant, agreeing with her position that, by refusing to grant her full credit for her DIT liability, the City is taxing Appellant at a higher rate than it would if she was a Philadelphia resident working entirely in Philadelphia, thus burdening her participation in interstate commerce. In so reasoning, ACTC proffers that, under Wynne, the City was required to give Appellant a credit for her excess DIT to offset the Philadelphia Tax, claiming that the Philadelphia Tax is indistinguishable from the “county” tax which was at issue in Wynne, given that municipal governments are “nothing more than creatures of the state.” ACTC’s Brief at 9. Relatedly, ACTC proffers that, because state and local taxes must, in its view, be considered as one, the lower court erred in finding that Appellant was subjected to a higher tax rate simply as a result of her choice to work in Delaware, which has a higher state tax rate. According to ACTC, “it is not Delaware’s responsibility to provide a credit, but rather Pennsylvania and Philadelphia, who are imposing a tax upon income earned elsewhere by their residents.” Id. at 11. ACTC argues that, here, the City should have credited the Wilmington Tax and the remainder of the DIT which did not offset the PIT against Appellant’s Philadelphia Tax liability, in order to place Appellant on “the same tax liability as . . . a Pennsylvania resident with the same income who worked solely in Philadelphia.” Id. at 13.

[J-5A-B-2023] - 16 F. J. Busse Co. v. City of Pittsburgh, 279 A.2d 14, 18 (Pa. 1971) (determining that a local

tax was not duplicative of the state tax). The City asks our Court to uphold this view,

stressing that the Philadelphia Tax is a local tax which was enacted via an ordinance

passed by Philadelphia’s City Council, and is administered, collected, and distributed by

the Department solely for the benefit of the City and its citizenry. Indeed, the City argues

that a municipality’s status as a creature of the state — and its attendant authority to

impose only such taxes as are permitted by the Commonwealth — “in no way converts a

purely local tax into a state tax.” City’s Brief at 14. In the City’s summation, “the [d]ormant

Commerce Clause does not require the City of Philadelphia to subsidize Delaware’s

decision to impose a higher tax rate on [Appellant] than the Commonwealth of

Pennsylvania.” Id. at 17.

Critically, the City contends that Appellant has failed to provide any case law which

actually supports her argument that state and local taxes must be assessed unitarily for

dormant Commerce Clause purposes. In that regard, the City maintains that Appellant

misconstrues Philadelphia Eagles, Northwood Construction, and 7-Eleven, as, according

to the City, those decisions merely affirmed that localities imposing taxes must satisfy the

requirements of the dormant Commerce Clause, including by providing credit for taxable

activity which occurred outside of the taxing jurisdiction, which the City stresses that it did

here. The City expounds that, in that trio of cases, this Court and the Commonwealth

Court “did not address whether local taxes and state taxes must be aggregated because

that question was not before any of the Courts.” City’s Brief at 18 (emphasis omitted).

Moreover, the City asserts that Appellant persistently misinterprets Wynne, as,

therein, the high Court did not find Maryland’s tax scheme unconstitutional on the basis

that state and local taxes must be considered in tandem, but, rather, it condemned

Maryland’s tax scheme because Maryland’s “county” tax was actually a duplicative state

[J-5A-B-2023] - 17 tax against which the state refused to offer credit for out-of-state taxes paid. The City,

thus, maintains that the manner in which the “county” tax functioned (i.e., it was enacted

by the state legislature and administered, collected, and distributed by Maryland’s

Comptroller) rendered it a state tax in disguise, whereas the Philadelphia Tax is a purely

local tax which is administered, collected, and distributed by the Department, and was

enacted by the Philadelphia City Council.

Contemplating Appellant’s claim that she was subjected to double taxation, the

City argues that the Department provided Appellant a full credit for income taxes paid to

Wilmington, leading her to incur only the same 3.922% Philadelphia Tax rate as a

Philadelphia resident working entirely in Philadelphia. From the City’s perspective, the

flaw in Appellant’s double taxation claim is palpable “when you consider what the outcome

would be if neither Wilmington nor Philadelphia had an income tax and [Appellant] was

only subject to Delaware and Pennsylvania income taxes.” Id. at 22. Specifically, the

City points out that, under such circumstances, Appellant would be taxed at Delaware’s

rate of 5% and would receive a credit from Pennsylvania equal to its tax rate of 3.07%,

such that Appellant would still incur a tax rate that is 1.93% higher than her in-state

cohorts (namely, Delaware’s full 5%). The City emphasizes that this scenario would

present no dormant Commerce Clause violation, as Pennsylvania would not be expected

to issue a further refund to account for Delaware’s higher tax rate. In the City’s view,

then, “[t]he Commonwealth Court correctly applied the same logic to the instant matter

and found that there was no double taxation because ‘[Appellant] never pays more than

one local tax or more than one state tax.’” Id. at 23 (quoting Zilka, 1063-1064 C.D. 2019,

at 5).

The City next addresses the Complete Auto test, preliminarily suggesting that the

two prongs thereof which are relevant in this case (specifically, the discrimination and fair

[J-5A-B-2023] - 18 apportionment prongs) address the same issue — the risk of double taxation. To that

end, the City asserts that the discrimination prong of the test is subsumed by the fair

apportionment prong, as the former prevents states from “discriminat[ing] against

interstate commerce either by providing a direct commercial advantage to local business,

or by subjecting interstate commerce to the burden of ‘multiple taxation,’” Nw. States

Portland Cement Co., 358 U.S. at 458 (citations and internal citations omitted), while the

latter ensures that “there is no danger of interstate commerce being smothered by

cumulative taxes of several states,” Complete Auto, 430 U.S. at 277. The City contends

that, here, there is no risk of double taxation, as the Philadelphia Tax meets both the

internal and external consistency tests of the fair apportionment prong of Complete Auto.

Maintaining that the Philadelphia Tax is internally consistent, the City reasons that

all taxpayers would face the same local income tax rate of 3.922% if every local taxing

authority in the nation imposed Philadelphia’s taxation scheme — collecting wage taxes

on income earned by residents within the jurisdiction and on income earned by residents

working outside of that taxing authority’s jurisdiction, but allowing the latter a credit against

their local wage taxes for wage taxes paid to out-of-state local taxing authorities.

Furthermore, the City argues that the result remains the same when the analysis is

expanded to assume that all states adopt Pennsylvania’s state income tax rate of 3.07%,

as well as its practice of providing credit against an individual’s income tax liability for

income taxes paid out-of-state. Critically, the City contends that Appellant “continues to

offer a distorted version of the internal consistency test” in reaching her conclusion that

the Philadelphia Tax is unconstitutional, City’s Brief at 28, as she utilized a hypothetical

scenario in which every taxing jurisdiction adopts a different tax rate, as opposed to the

correct hypothetical in which every taxing jurisdiction adopts the same practice and the

same tax rate, id. at 32. Thus, according to the City, “[w]hen the internal consistency test

[J-5A-B-2023] - 19 is applied correctly – using identical tax rates – Philadelphia’s (and Pennsylvania’s)

[income tax] schemes satisfy the internal consistency test.” Id.

Likewise, the City claims that its tax scheme is externally consistent, as the City

has authority to tax all of Appellant’s income, wherever earned, based on her domicile in

Philadelphia. See Okla. Tax. Cmm’n v. Chickasaw Nation, 515 U.S. 450, 463 (1995)

(“Domicile itself affords a basis for . . . taxation.”). In any event, the City asserts that it

“negates any claim of unfair apportionment or double taxation” by “provid[ing] a credit for

a resident’s out-of-state activity.” City’s Brief at 33 (citing, inter alia, House of Lloyd v.

Commonwealth, 684 A.2d 213, 217 (Pa. Cmwlth. 1996) (“The Commonwealth’s use tax

is fairly apportioned in that it includes the customary provisions against duplication,

including a credit for sales tax paid to another state.”); Goldberg, 488 U.S. at 264 (“The .

. . taxing scheme is fairly apportioned, for it provides a credit against its use tax for sales

taxes that have been paid in other States.” (ellipses original))). Lastly, the City maintains

that Philadelphia Eagles, Northwood Construction, and 7-Eleven do not support

Appellant’s argument that the full credit she received for her Wilmington Tax is insufficient

to satisfy the external consistency test. Indeed, the City contends that this trio of cases

is distinguishable from the instant matter because, in each of those cases, “the offending

jurisdiction failed to give any credit for taxes paid to another jurisdiction,” id. at 34,

whereas, here, “the City provided full credit for any out-of-jurisdiction activity, satisfying

the external consistency test,” id. at 35. Accordingly, in light of the foregoing, the City

asks our Court to affirm the decision of the court below.8

8 The Pennsylvania Department of Revenue (“PDOR”) submitted an amicus brief in support of the City. Therein, PDOR avers that the Commonwealth Court properly applied the Complete Auto test and found this matter distinguishable from Wynne. Countering Appellant’s Complete Auto assessment, PDOR argues that the City’s tax scheme meets the internal consistency test because, unlike the Maryland tax scheme in Wynne, the City offsets the Philadelphia Tax by granting residents credit for taxes paid to other local (continued…)

[J-5A-B-2023] - 20 jurisdictions, such as Wilmington. In that regard, PDOR emphasizes that, if the Philadelphia/Pennsylvania tax scheme was applied in every jurisdiction, no resident would ever be subject to double taxation, thus demonstrating internal consistency. PDOR explains that any heightened tax burden on Appellant versus that incurred by her intrastate peers stems from the interaction of two different — but nondiscriminatory — tax schemes, which is permissible under the dormant Commerce Clause. PDOR next highlights that, while the external consistency test has been employed by the high Court in corporate tax cases and sales tax cases, Wynne presented the Court with the first opportunity to apply the test in the context of a resident-based individual income tax, but the Court declined to do so, finding that the tax in question failed the internal consistency test. Moreover, PDOR notes that the Wynne Court “endorse[d] the ability of a resident state to tax all of its resident’s income, so long as it does not run afoul of the internal consistency test.” PDOR’s Brief at 14 (emphasis omitted) (citing Wynne, 575 U.S. at 566-68). Hence, PDOR concludes that “there is no clear holding in Wynne that a residence-based income tax must be externally consistent.” Id. at 15. PDOR additionally directs our Court to Justice Ginsburg’s dissenting opinion in Wynne, and the hypothetical “fix” she offered — specifically, Justice Ginsburg suggested that Maryland could amend its tax code to eliminate the special non-resident tax and simply continue taxing all residents’ income regardless of source, Wynne, 575 U.S. at 582 (Ginsburg, J., dissenting) — with which the Wynne majority ultimately acquiesced, see id. at 568-69 (majority opinion). PDOR explains that, in its view, the Wynne Court could not have envisioned applying the external consistency test in the context of a resident-based individual income tax, as this “fix” would indubitably fail the test. PDOR submits that a recent Utah Supreme Court decision, Steiner v. Utah State Tax Comm’n, 449 P.3d 189, 197 (Utah 2019) (opining that the Wynne Court “strongly implied that tax systems that fail external consistency would nonetheless pass constitutional muster”), underscores its reasoning in this regard. In any event, PDOR agrees with the Commonwealth Court’s determination that the Philadelphia Tax is externally consistent because the City provides its residents with tax credit for wage taxes paid to outside jurisdictions and, in so doing, does not tax more than its fair share of residents’ income. In PDOR’s view, the City “is economically justified [in] taxing a resident on all of his income because residents receive all of the protections and benefits afforded by the resident jurisdiction, e.g., fire, police, public utilities.” PDOR’s Brief at 18. Lastly, PDOR avers that our Court’s adoption of Appellant’s argument would detrimentally impact state and local tax revenues “without any clear indication from the U.S. Supreme Court that such a result is mandated.” Id. at 19. PDOR submits that Appellant’s argument, if adopted, would require “the Commonwealth and its political subdivisions, which have lower tax rates, to export their tax revenues to bordering states and jurisdictions with higher tax rates,” thus threatening “the Commonwealth’s ‘fiscal well- being’” and encouraging our government “to increase its tax rates to keep from losing (continued…)

[J-5A-B-2023] - 21 IV. Analysis

As an initial matter, we emphasize that the question of aggregation for purposes

of a dormant Commerce Clause analysis is a matter of first impression for this Court. To

that end, we reject Appellant’s assertion that Philadelphia Eagles, Northwood

Construction, and 7-Eleven demonstrate that this Court and the Commonwealth Court

“have consistently recognized that a Commerce Clause analysis must examine the local

tax as it relates to the state tax.” Appellant’s Brief at 17 (emphasis original). In this trio

of cases, neither our Court nor the lower court pronounced that local and state taxes must

be aggregated in conducting a Complete Auto analysis under the dormant Commerce

Clause; thus, these cases do not control our initial query.9 Instead, we place paramount

importance on the high Court’s decision in Wynne, which we find to be instructive on the

question of aggregation. Based thereon, we find that, in addressing Appellant’s dormant

Commerce Clause challenge, we must examine the circumstances surrounding the

Philadelphia Tax in order to determine whether it is truly a local tax or is, instead, a state

tax masquerading as a local tax.

As noted, in Wynne, the high Court found that Maryland’s “county” tax was

essentially little more than a state tax masquerading as a local tax, given that the state

imposed the tax via state legislation and the state’s comptroller collected the tax. See

Wynne, 575 U.S. at 546. In our view, the Court’s logic and characterization of the county

tax as a state tax based on the circumstances underlying its creation and the manner of

its collection via the state’s comptroller reveal that state and local taxes need not be

revenue to other states.” Id. at 21. Accordingly, PDOR urges our Court to affirm the decision of the Commonwealth Court. 9 We similarly find that Lohman, supra, is not relevant to our consideration of this issue,

as it does not address the need, vel non, to aggregate state and local taxes in a dormant Commerce Clause analysis.

[J-5A-B-2023] - 22 aggregated for purposes of a dormant Commerce Clause analysis, as Appellant

contends. Indeed, nowhere in its comprehensive opinion did the Wynne Court endorse

the notion that local taxes are essentially a legal fiction, indistinguishable from state taxes.

Rather, in our view, the Court sanctioned an ad hoc approach, under which a “local”

income tax may be deemed indistinguishable from the corresponding state’s income tax

only if, like Maryland’s “county” tax, it is actually a duplicative state tax in disguise.

Here, the Philadelphia Tax is readily distinguishable from the county tax at issue

in Wynne, as the latter was enacted by the State of Maryland and collected by Maryland’s

comptroller, whereas the Philadelphia Tax was enacted by Philadelphia’s City Council

and is collected by the City’s Department of Revenue solely for the benefit of the City and

its citizenry. In light of this stark contrast, we reject Appellant’s argument that Wynne

mandates that we aggregate the Philadelphia Tax with the PIT in discerning whether it

violates the dormant Commerce Clause, as her view in that regard is contrary to the high

Court’s teachings in Wynne.

We likewise reject Appellant’s claim that the City was required to aggregate the

Philadelphia Tax and the PIT because local governments, such as the City, are creatures

of statute, which derive taxation authority solely from the legislative enactments of our

General Assembly. It is axiomatic that “[t]he validity of the taxing ordinance does not

depend upon whether the tax is regarded in a legal sense as a state or local tax,” given

that “[a]ll taxes in Pennsylvania levied by municipal and quasi municipal corporations

must, of course, be authorized by the legislature.” McClelland, 57 A.2d at 848. Indeed,

our Court has recognized that, “[i]n that sense, therefore, all [taxes] may be considered

state taxes.” Id. (emphasis original). Nevertheless, although our Court has

acknowledged that, in a sense, state and local taxes are indistinguishable, as both are

authorized by state legislation, we have also stressed that “[s]tate taxes stand on a

[J-5A-B-2023] - 23 different basis from local levies.” Id. In that vein, we have highlighted that state taxes

“are essential to the very ‘preservation’ of the state itself,” whereas local taxes “are

authorized or permitted by the state, not for its actual preservation, but merely to maintain

the machinery of local government.” Id. (internal citations omitted); see Nat’l Biscuit, 98

A.2d at 186 (observing that, in McClelland, we concluded that “a tax imposed for the

benefit merely of a local political subdivision, and not for general State purposes, is not

to be regarded as a State tax”). Thus, nothing in the high Court’s teachings, nor in our

own jurisprudence, stands for the premise that state and local taxes are broadly

indistinguishable, much less supports Appellant’s conclusion that state and local taxes

must be aggregated for purposes of a dormant Commerce Clause analysis.

Aside from her reliance on Wynne, which, as explained above, undermines her

argument in favor of aggregation, and Philadelphia Eagles, Northwood Construction, and

7-Eleven, which are inapposite to the issue, Appellant provides little else to justify her

view that we must consider the Philadelphia Tax in tandem with the PIT in addressing her

dormant Commerce Clause challenge. In her final effort to sway this Court with respect

to the question of aggregation, Appellant proffers three out-of-state cases — Arizona

Public Service, supra; General Motors, supra; and Matkovich, supra. In the first of these

cases, an Arizona court of appeals held that an Arizona public utility company which

purchased coal from a mine located in McKinley County, New Mexico, was entitled to tax

credits, against the amount it paid in Arizona’s use tax, for gross receipts taxes which the

company paid to both New Mexico and McKinley County. In so concluding, the Arizona

court of appeals examined A.R.S. § 42-1409,10 which governed the state’s use tax and

provided an express exemption whereby the use tax did not apply to “[t]angible personal

10Section 42-1409 was renumbered following the court’s decision in Arizona Public Service.

[J-5A-B-2023] - 24 property the sale or use of which has already been subjected to an excise tax at a rate

equal to or exceeding the tax imposed by this article under the laws of another state of

the United States.” Id. § 42-1409(A)(2). The provision further provided that, “[i]f the

excise tax imposed by the other state is at a rate less than the tax imposed by this article,

the tax imposed by this article is reduced by the amount of the tax already imposed by

the other state.” Id. The court found that the plain language of the statute — crediting a

taxpayer for excise taxes paid on personal property “under the laws of another state” to

offset Arizona’s use tax — required it to exempt the utility company from the use tax for

the gross receipts taxes paid to both the State of New Mexico and McKinley County. With

respect to the latter taxing authority, the court observed that the county was entitled to

impose its gross receipts tax on taxpayers solely by virtue of its “derivative relationship”

with the state, and, more precisely, from the state’s enabling statutes. Ariz. Pub. Serv.

Co., 934 P.2d at 799. Tellingly, however, the court concluded that this relationship

between the state and county revealed that the word “under,” as employed by Arizona’s

legislature in Section 42-1409(A)(2), was unambiguous and justified an exemption for the

gross receipts tax which the utility company paid to McKinley County.

While the Arizona intermediate court briefly mentioned the Commerce Clause in

its disposition of the tax issue before it, its focus, undoubtedly, was on the language of its

state’s legislation, and it is that legislation which governed the outcome of the case. As

such, Arizona Public Service does not support the novel practice of aggregating state and

local taxes for purposes of a dormant Commerce Clause analysis.

Likewise, General Motors is of limited value. Therein, the Colorado Supreme Court

was tasked with determining whether a use tax imposed by the City and County of Denver

violated the dormant Commerce Clause. In finding that it did, the court preliminarily

concluded that “[i]nternal consistency [under Complete Auto] requires that states impose

[J-5A-B-2023] - 25 identical taxes when viewed in the aggregate — as a collection of state and sub-state

taxing jurisdictions.” General Motors, 990 P.2d at 69. Markedly, this brief conclusory

statement represents the entirety of the court’s reasoning, or lack thereof, underlying its

determination that state and local taxes must be aggregated for consideration under the

dormant Commerce Clause. Thus, General Motors provides a poor basis on which for

our Court to declare, for the first time, that state and local level taxes are one and the

same for purposes of the Commerce Clause.11

11 Notably, the General Motors court also erroneously employed the Complete Auto test.

Specifically, in attempting to discern whether Denver’s taxation scheme was internally consistent, the court provided the following hypothetical scenario: [I]f Colorado imposed a 1% sales or use tax and Denver a 2% tax, a purchaser or user would owe a 3% total tax. Similarly, if Michigan collected a 2% sales or use tax and Detroit a 1% tax, a purchaser or user in Detroit would pay a 3% total tax. However, a user who purchased the item in Detroit would be subject to an additional 1% tax upon the storage or use of the item in Denver because section 53–92(c) only credits taxes paid to other municipalities. Thus, Denver’s use tax could burden interstate commerce if every other state and municipality employed the same tax structure as Colorado and Denver, but imposed different tax rates. General Motors, 990 P.2d at 70. This is an inaccurate application of the internal consistency test, as the Colorado Supreme Court invented a scenario with “similar” tax schemes in Colorado and Michigan, but with differing rates of taxation, and which are inverted such that Colorado’s tax rate matched that of Detroit, and Michigan’s tax rate matched the rate imposed by Denver. The court was correct that this scenario could have led to double taxation, as an individual who purchased an item in Detroit would have received a 1% credit against his or her Denver tax, leaving 1% remaining. Based on its view in this regard, the court reasoned that Denver’s tax structure was “internally inconsistent because Denver’s credit mechanism could cause multiple taxation even if every state and municipality were to impose a taxing scheme similar to the one present in Colorado and Denver.” Id. at 69 (emphasis added). Yet, the internal consistency test does not operate, as the Colorado Supreme Court suggested, in terms of “similar taxes.” Rather, the appropriate question, which we address below, is whether an individual would be subject to double taxation if all states and local taxing authorities were to adopt the same taxes and crediting systems as Pennsylvania and Philadelphia. See Wynne, 575 U.S. at 562 (“This test, which helps (continued…)

[J-5A-B-2023] - 26 The third and final out-of-state case on which Appellant relies, Matkovich, also

provides negligible support for her claim that state and local income taxes must be viewed

as one under the dormant Commerce Clause. In Matkovich, the West Virginia Supreme

Court concluded that a tax credit statute, W. Va. Code § 11-15A-10a, which operated to

offset the state’s motor fuel use tax, violated the dormant Commerce Clause because the

state’s tax department applied the statute in a manner which provided a taxpayer credit

only for sales taxes paid on fuel to other states and not for such taxes paid to cities,

counties, and localities of other states. Relying on Wynne, Arizona Public Service, and

General Motors, the court found that proper application of the statute entitled taxpayers

to receive sales tax credits for sales taxes paid to other states and to subdivisions of other

states. In so doing, the court opined that “[a]ny other construction of th[e] statute would

invariably violate the Commerce Clause’s prohibition on subjecting interstate transactions

to a greater tax burden than that imposed on strictly intrastate dealings.” Matkovich, 793

S.E.2d at 897. We are unpersuaded by Matkovich, given that the court therein derived

support for its conclusion from Arizona Public Service, which, as discussed, is

distinguishable from the instant case, and from General Motors, which, as noted,

concluded that state and local taxes must be aggregated without citing any authority or

undertaking any semblance of a substantive analysis with respect to the issue. Moreover,

we find that the Matkovich court’s ruling contravenes the high Court’s reasoning in

Wynne, which, as explained, requires an ad hoc assessment of the local income tax

scheme at issue to discern whether it is distinct from the corresponding state income tax

or indistinguishable therefrom for purposes of a Complete Auto analysis.

courts identify tax schemes that discriminate against interstate commerce, looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.” (emphasis added; citations and internal quotation marks omitted)).

[J-5A-B-2023] - 27 Thus, Appellant has failed to persuade us that her construction of the dormant

Commerce Clause aligns with Wynne, and these three out-of-state cases do not sway us

in her favor. Accordingly, consistent with Wynne, we conclude that the Philadelphia Tax

was enacted, and operates, as a purely local tax, given that it was promulgated by

Philadelphia’s City Council and is collected by the Department for the sole benefit of the

City and its residents; as a result, we will not consider these state and local taxes in the

aggregate in applying the Complete Auto test.

Having determined that the Philadelphia Tax and the PIT should be treated as

discrete taxes, we must consider whether the City’s tax scheme discriminates against

interstate commerce. We conclude, as did the Commonwealth Court, that the

Philadelphia Tax and the City’s corresponding crediting system satisfy the test set forth

in Complete Auto.

As explained above, Appellant challenges the Philadelphia Tax under two prongs

of the Complete Auto test: first, she contends that the City’s tax scheme is not fairly

apportioned; and second, she avers that the tax scheme discriminates against interstate

commerce. In assessing whether the tax scheme is fairly apportioned, we must

determine whether it is internally and externally consistent. Once more, the high Court’s

decision in Wynne provides clear guidance with respect to this endeavor.

To briefly reiterate, the Wynne Court found that Maryland’s tax scheme was not

internally consistent because, if every state adopted the three taxes at issue (the county

tax, the state tax, and the special non-resident tax) and adopted Maryland’s system of not

crediting against those taxes, residents who paid income tax to out-of-state jurisdictions

would incur double taxation. Wynne, 575 U.S. at 565. The Court stressed that such

double taxation was “not simply the result of [the tax scheme’s] interaction with the taxing

schemes of other States,” but, instead, emanated from inherent discrimination contained

[J-5A-B-2023] - 28 within the scheme. Id. (citations omitted). Pertinently, in declaring Maryland’s tax scheme

unconstitutional, the Court explained that “Maryland could remedy the infirmity in its tax

scheme by offering, as most States do, a credit against income taxes paid to other

States,” which would vindicate the tax scheme under the internal consistency test. Id. at

568 (citation omitted).

In accordance with Wynne, we must now determine whether the City’s tax scheme

is internally consistent. To do so, we must assume that all local taxing jurisdictions adopt

the Philadelphia Tax rate of 3.922% and the City’s corresponding practice of crediting

taxpayers for local taxes paid to other jurisdictions. In this scenario, April, who lives in

State A and works exclusively in State A, would pay 3.922% once to State A, while Bob,

who lives in State A but works in State B, would also pay only 3.922% once, to State B,

because State A would permit him a credit against its own tax. Thus, both in-state and

out-of-state taxpayers would yield the same tax obligation. The same remains true even

if we add the Commonwealth’s state tax to this hypothetical, as each taxpayer would

simply incur an additional state tax obligation of 3.07% consistent with the PIT and the

Commonwealth’s corresponding practice of offsetting the PIT with state taxes paid

elsewhere. Accordingly, when the internal consistency test is properly applied to the

Philadelphia Tax and the PIT, along with the corresponding tax credits permitted by the

City and the Commonwealth, it is evident that any remaining “disparate incentives to

engage in interstate commerce” stem solely from “the interaction of two different but

nondiscriminatory and internally consistent schemes.” Id. at 562 (citations omitted); see

Steiner, 449 P.3d at 197 (finding that, because Utah offered a tax credit for out-of-state

taxes, it was internally consistent and compatible with Wynne); Goggin v. State Tax

Assessor, 191 A.3d 341, 347 (Me. 2018) (“Here, the Maine statute expressly allows a

[J-5A-B-2023] - 29 credit for the payment of individual income taxes to other states . . . and therefore does

not run afoul of Wynne.”).

Hence, the Commonwealth Court correctly determined that any excess taxes paid

by Appellant were simply the result of Delaware’s higher income tax rate of 5%, rather

than any inherent discrimination contained in the Philadelphia Tax or the City’s practice

of offsetting its tax with credits paid only to local taxing jurisdictions. A simple hypothetical

bolsters our conclusion in this regard: If neither Philadelphia nor Wilmington imposed a

local wage tax, Appellant would have nonetheless paid 1.93% more in income taxes than

her Pennsylvania counterparts who worked solely in the Commonwealth, as the DIT rate

was 5% while the PIT rate was 3.07%. In this hypothetical, Commerce Clause principles

would not have required the Commonwealth to credit Appellant beyond the 3.07% which

it already permitted her, nor would Delaware incur any similar obligation to lessen

Appellant’s tax burden, given that states may set their own income tax rates. Certainly,

the City should not be required to subsidize Delaware’s higher tax rate when it already

offsets its Wage Tax by crediting taxpayers for analogous local taxes paid outside of its

jurisdiction. For these reasons, we find that the Philadelphia Tax meets the internal

consistency test, and that, relatedly, the tax is not discriminatory under the third prong of

the Complete Auto test because the City imposes a consistent tax on all residents and

provides the necessary credit against similar out-of-state local taxes paid by them. See

Armco Inc., 467 U.S. at 644 (commingling consideration of the internal consistency test

and the discrimination prong of the Complete Auto test because “[a] tax that unfairly

apportions income from other States is a form of discrimination against interstate

commerce”); see also City’s Brief at 25-26 (advocating that the discrimination and fair

apportionment prongs of the Complete Auto test merge).

[J-5A-B-2023] - 30 Additionally, we find that the Philadelphia Tax meets Complete Auto’s external

consistency test, which examines “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.” Jefferson Lines, 514

U.S. at 185. It is well-established that “domicile in itself establishes a basis for taxation”

because the “[e]njoyment of the privileges of residence within the state, and the attendant

right to invoke the protection of its laws, are inseparable from the responsibility for sharing

the costs of government.” Lawrence, 286 U.S. at 279. Indeed, “[a] tax measured by the

net income of residents is an equitable method of distributing the burdens of government,”

which include public education and emergency services, “among those who are privileged

to enjoy its benefits.” People of State of N.Y. ex rel. Cohn v. Graves, 300 U.S. 308, 313

(1937). Consequently, we agree with the lower court that “Philadelphia’s provision of

municipal benefits and services to its residents provides sufficient economic justification

for the imposition of its Wage Tax.” Zilka, 1063-1064 C.D. 2019, at 9 (citation omitted).

Moreover, as the lower court explained, “Philadelphia avoided taxing more than its fair

share of [Appellant’s] wages by providing a tax credit for 100% of the Wilmington Tax.”

Id. Thus, we find that the City’s tax scheme is externally consistent under Complete Auto.

For these reasons, we conclude that the City did not violate the dormant

Commerce Clause by imposing upon Appellant the Philadelphia Tax, crediting her for the

similar local tax she paid to Wilmington, but declining to afford her an additional credit for

the state taxes she paid to Delaware, as the tax scheme is both internally and externally

consistent and is not discriminatory against interstate commerce, in conformance with the

Complete Auto test. To hold otherwise would, in effect, nullify the high Court’s venerable

recognition that “tax schemes that create disparate incentives to engage in interstate

commerce (and sometimes result in double taxation) only as a result of the interaction of

[J-5A-B-2023] - 31 two different but nondiscriminatory and internally consistent schemes” are not

unconstitutional. Wynne, 575 U.S. at 562. Accordingly, we affirm the Commonwealth

Court’s decision concluding that the tax scheme is constitutional.

Justices Donohue and Wecht join the opinion.

Justice Wecht files a concurring opinion.

Justice Dougherty files a dissenting opinion in which Justice Mundy joins.

Justice Brobson did not participate in the consideration or decision of this matter.

[J-5A-B-2023] - 32