News and Insights

Constitutionality of New York’s Fixed Dollar Minimum Tax in Question

Tax Development Oct 31, 2011

In an action filed in New York State court by Morrison & Foerster LLP, tax services firm Ryan, LLC (“Ryan”) challenged the constitutionality of New York State’s fixed dollar minimum tax (FDMT), a computational method for determining the minimum tax payable by S corporations, which was in effect from 2003 through 20071. During those years, the FDMT was based on the S corporation’s gross payroll (wages, salaries, and other personal compensation), regardless of whether any such related services were performed by employees located in New York.

Ryan argued that New York’s FDMT violates the Due Process and Commerce Clauses of the U.S. Constitution. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the U.S. Supreme Court articulated a four-prong test to determine whether the imposition of a state tax is permissible under the Commerce Clause, and Ryan alleged that the FDMT violates three of the four criteria, arguing that the FDMT is not fairly apportioned; it discriminates against interstate commerce; and it is not fairly related to the services provided in the state.

The New York State Department of Taxation and Finance refunded the FDMT amount challenged, only after the complaint was filed, and did not issue any general advice concerning the alleged unconstitutionality, arguing that Ryan had recovered its own tax refund and could no longer challenge the constitutionality of the statute concerning all others. Therefore, each other similarly situated taxpayer must individually claim an FDMT refund.

These results confirm that refund opportunities may yet be available to FDMT payers who had payroll in multiple jurisdictions but paid the tax on their entire payroll during 2003 through 2007. Given the years at issue, the statute of limitations on refunds for many taxpayers will soon be expiring, so this opportunity should be promptly considered.

1The Legislature changed the computation of the fixed tax for years beginning on or after January 1, 2008 so that it now provides for apportionment. Laws 2008, Ch. 57.


G. Brint Ryan
CEO and Managing Principal