The state of West Virginia cannot provide a tax exemption to state law enforcement retirees while denying that exemption to federal law enforcement retirees who performed similar jobs, the Supreme Court held on Wednesday (Dawson v. Steager, No. 17-419 (U.S. 2/20/19)).
West Virginia exempts the pension benefits of certain former state and local law enforcement employees from state taxation (W. Va. Code §11-21-12(c)(6)). However, the pension benefits of retired federal employees who reside in the state are not afforded the same exemption. James Dawson, a retiree who worked for the U.S. Marshals Service, sued the state, claiming the West Virginia statute violates the intergovernmental tax immunity doctrine (4 U.S.C. §111). That statute allows state taxation of federal employees, but only if the taxation “does not discriminate against [the federal] employee because of the source of the pay or compensation” (4 U.S.C. §111(a)).
A trial court agreed that the state statute violated the anti-discrimination provision of Section 111, finding no significant differences between Dawson’s duties as a federal marshal and those of local and state law enforcement personnel whose pensions were exempt from tax under the statute. The West Virginia Supreme Court of Appeals reversed that decision, finding that the state tax exemption applies to only a narrow class of retirees and that it was not intended to discriminate against former federal marshals (Steager v. Dawson, No. 16-0441 (W. Va. 5/17/17)).
The U.S. Supreme Court unanimously sided with Dawson, finding that the state statute unlawfully discriminated against him in violation of Section 111. The Court has previously held that a state violates Section 111 when it treats retired state employees more favorably than retired federal employees and there are no significant differences between the two classes to justify the different treatment (Davis v. Michigan Dep’t of Treasury, 489 U.S. 803 (1989)).
The Court agreed with the trial court that there were no significant differences between Dawson’s former job responsibilities and those of state law enforcement officers, and it determined that the state statute expressly gives state law enforcement retirees a tax benefit that federal retirees cannot receive. Therefore, the Court held that the statute was unlawfully discriminatory. It reversed the West Virginia Supreme Court of Appeals’ decision and remanded the case for determination of an appropriate remedy.
— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor-in-chief.