News and Insights

Mississippi Supreme Court Finds Dividend Exclusion Provision Violates U.S. Constitution

Tax Development Nov 03, 2016

Under Mississippi Code Section 27-7-15(4)(i), the recipient of an intercompany dividend may exclude the dividend income from its tax base if the payor was doing business in the state and filed a Mississippi income tax return. The Mississippi Supreme Court addressed the constitutionality of this statute on October 27, 2016, in Department of Revenue v. AT&T.1 The Court reviewed the statute under the dormant commerce clause analysis in Complete Auto.2

The Mississippi Department of Revenue had argued that Complete Auto did not apply in the context of a deduction relying on Dept. of Revenue of Ky. v. Davis and Or. Waste Sys. Inc. v. Dept. of Envt'l Quality of Or.3 In those cases, the Court then considered whether the State had a legitimate interest to justify the different treatment among taxpayers. However in both of those cases, the state conceded that the statutes at issue were facially unconstitutional.

In the AT&T case, the Mississippi DOR had not conceded the unconstitutionality of the dividend exclusion statute. Therefore, the Court ruled that Complete Auto applied and that the Mississippi statute violated the internal consistency clause of the dormant commerce clause. In its analysis, the Court relied on its recent decision in Comptroller of the Treasury v. Wynne.4 Therefore, the Mississippi Supreme Court concluded “[f]or while Mississippi offers a dividend exclusion to nexus subsidiaries of AT&T, non-nexus subsidiaries of AT&T do not receive such an exemption, because the dividend income had not already borne a tax under Section 27-7-15(4)(i). The total tax burden on AT&T is disparate because, with regard to AT&T’s non-nexus subsidiaries, AT&T bears an additional burden from which its nexus subsidiaries are exempt.” The Mississippi Supreme Court held that the Mississippi dividend exclusion provision was unconstitutional under the Commerce Clause.

1 Dep't of Revenue v. AT&T Corp., No. 2015-CA-00600-SCT, Supreme Court, October 27, 2016.
2 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
3 Ky Dep't of Revenue v. Davis, 553 U.S. 328 (U.S. 2008) and Or. Waste Sys. v. Dep't of Envtl. Quality, 511 U.S. 93 (U.S. 1994).
4 Comptroller of the Treasury v. Wynne, 135 S. Ct. 1787 (U.S. 2015).


Mary Bernard