Today, the United States Supreme Court granted a request for review in the case of First Marblehead Corporation v. Massachusetts Commissioner of Revenue, and summarily vacated the decision issued January 28, 2015, by the Supreme Judicial Court of Massachusetts. The case has been remanded to the Supreme Judicial Court for further consideration in light of the U.S. Supreme Court’s decision earlier this year in Comptroller of Treasury of Md. v. Wynne.1
The U.S. Supreme Court’s decision in Wynne held that Maryland’s personal income tax scheme (which allowed a credit against the state tax, but not the local tax, for taxes paid to another state) violated the Dormant Commerce Clause. InWynne, the Court held in a 5-4 decision that the Dormant Commerce Clause precluded Maryland from imposing a tax that discriminates against interstate commerce by favoring intrastate over interstate economic activity, or that might lead to double-taxation of out-of-state income. The Supreme Court’s decision affirmed the use of the internal consistency test as the measuring stick for Dormant Commerce Clause violations resulting for double-taxation.
The Massachusetts Supreme Judicial Court (“SJC”) is now tasked with applying the internal consistency test to First Marblehead’s facts. First Marblehead involves Massachusetts’ rules for the sourcing of loans by financial institutions for property factor purposes. For property factor purposes, Massachusetts sources loans of financial institutions to the regular place of business of the financial institution where the preponderance of substantive contact with respect to the loan occur. The location where the preponderance of substantive contacts with respect to a loan occur is determined based on the location of five factors, referred to as the SINAA factors (solicitation, investigation, negotiation, approval and administration). However, in First Marblehead, the taxpayer purchased loans originated by third-party banks and contracted with an unaffiliated servicing company to handle administration of the loans. Based on these facts, the Massachusetts Appellate Tax Board (“ATB”) found that the taxpayer had no SINAA factors, and sourced all of the taxpayer’s loans to its commercial domicile in Massachusetts.2
In its vacated decision, the SJC affirmed the ATB’s holding, which resulted in a 100% Massachusetts property factor for the taxpayer. It is that result that now must be scrutinized by the SJC under the internal consistency test.