Today, the U.S. Supreme Court vacated the decision of the Massachusetts Supreme Judicial Court (SJC) in First Marblehead Corp. v. Commissioner of Revenue1 (First Marblehead) and remanded the case back to the court for reconsideration in light of the holding in Comptroller of the Treasury v. Wynne.2 InFirst Marblehead, a taxpayer was denied the ability to apportion its loan portfolios to a state other than Massachusetts for purposes of computing its property factor by the Massachusetts Department of Revenue (Department).
For financial institutions, Massachusetts includes loans in the property factor numerator of the jurisdiction where the preponderance of the corporation’s “SINAA” (solicitation, investigation, negotiation, approval and administration) activities occur with respect to the loan. The taxpayer purchased and securitized education loans, but did not originate or service any of the loans in its portfolio. Consequently, the taxpayer did not have any SINAA factors. The SJC held that in the absence of SINAA factors, all of the loans were sourced to the taxpayer’s commercial domicile (Massachusetts), which resulted in a 100% Massachusetts property factor.
First Marblehead filed a petition for a writ of certiorari following the Supreme Court’s decision in Wynne. It argued that Wynne reaffirmed that an apportionment formula must be “internally consistent” – a test to determine whether a tax scheme creates double taxation. The brief emphasized the constitutional failures of the Massachusetts regime by analogizing the regime to the Maryland regime struck down in Wynne:
An irrebutable presumption assigning a loan to the taxpayer’s commercial domicile if the commercial domicile is located in the taxing jurisdiction is nothing more than a form of residence-based taxation, no different that the residence-based portion of the Maryland tax in Wynne. . . . As a result, a taxpayer that outsources the servicing of its loans to a servicer outside of its commercial domicile would be subject to higher taxes in the aggregate than a taxpayer that used a service located in the taxing jurisdiction.3
The Tax Executives Institute (TEI) filed an amicus brief in this case arguing that the SJC incorrectly applied the internal consistency test.4 The SJC erred by asking whether the taxpayer was subjected to actual double taxation, but the internal consistency test requires far less: a hypothetical replication of the regime in every state to determine whether it creates double taxation. TEI’s suggested remedy was to vacate the decision of the SJC and remand it back to that court. The Supreme Court agreed with TEI’s suggested remedy, vacated the SJC’s decision and remanded the case back to the SJC. The SJC will now need to correctly apply the internal consistency test to determine whether the Massachusetts regime is unconstitutional.