The Mississippi Supreme Court recently addressed the constitutionality of Mississippi’s three-year statute of limitations. The taxpayers, former New York residents, filed Mississippi resident individual income tax returns for the 2008 and 2009 tax years. Some of the income reported on those returns derived from the husband’s stock options. The stock options, which had been granted over several years before the taxpayers moved to Mississippi, vested over multiple years, including after the couple relocated to Mississippi. In 2012, New York initiated an audit related to the exercise of the stock options. The audit was completed in 2014, and the taxpayers were required to pay additional New York taxes and interest. Because Mississippi law allows residents to take a credit for tax paid to other states, the taxpayers filed amended returns in 2015 requesting a refund of Mississippi taxes paid in 2008 and 2009. The Mississippi Department of Revenue denied the refund on the basis that it was outside the three-year statute of limitations period. After multiple unsuccessful appeals, the taxpayers challenged the constitutionality of the limitations period before the state’s highest court. In essence, their argument was that the three-year statute of limitations impermissibly burdened interstate commerce because it did not give taxpayers sufficient time to amend a Mississippi tax return after an audit by another state, which can take far longer than three years. Interestingly, the taxpayers asserted that Mississippi’s statute of limitations should be invalidated under the internal consistency test of the dormant Commerce Clause because taxpayers with income from other states will suffer more from Mississippi’s statute of limitations than taxpayers whose income is derived solely from Mississippi.
At the outset, the court observed that the Complete Auto test was not applicable because the test was specifically intended to address the constitutionality of a tax, rather than a procedural statute related to a tax. Moreover, the court held that the taxpayers improperly applied the second prong of the test—fair apportionment—when they argued that the statute of limitations period was not internally consistent. The taxpayers had cited no instances in which a court found a tax scheme failed the internal consistency test because of practical or collateral issues such as the statute of limitations, and the court declined to extend the internal consistency test to this type of question. Furthermore, if the internal consistency test was to be applied as the taxpayers argued, in the court’s view, no tax on interstate commerce—which is necessarily more complicated than a tax on a purely intrastate matter and thus inevitably subject to more errors and associated costs—could survive the test. After determining that the internal consistency test was inapplicable to the situation at hand, the court applied the Pike balancing test. This test looks to whether the tax statute “regulates even-handedly to effectuate a legitimate local public interest.” If the effects on interstate commerce are only incidental, the tax will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.
With regards to the Mississippi statute of limitations, the court held that the statute did not discriminate against and had only an incidental effect on interstate commerce. Specifically, the statute of limitations law did not distinguish between in-state and out-of-state taxpayers, nor did it create a distinction between interstate and intrastate commerce. Moreover, the taxpayers failed to produce any evidence of discriminatory effect. While the court recognized the difficulty associated with earning and reporting income in multiple states, in its view, the taxpayers failed to establish, as required, that limitations period statute was “excessive in relation to the putative local benefits.” Please contact Greg Aughenbaugh at 813-301-2151 with questions on this decision.