income tax subtraction;
dividends; repeal
HB 2088 eliminates the corporate income tax deduction for dividend income received from Arizona corporations.
The bill was amended in the Ways and Means Committee to add an effective date and a Prop 108 clause. The Ways and Means Committee amendment was adopted in the Committee of the Whole.
In 1973, the Legislature enacted a corporate and individual income tax deduction for dividends received from Arizona corporations. (Arizona corporations must have more than 50% of their business in Arizona.) In 1989, the Legislature passed a bill to increase the individual income tax while at the same time providing simplification. Consequently, this provision was repealed for individuals beginning in the 1990 tax year. The corporate deduction still exists.
The estate of Helen Ladewig filed a refund claim on
the grounds that this deduction was an unconstitutional violation of the
commerce clause and sought a refund for tax years 1986 through 1989. This was the only claimed filed. The case further claimed it was seeking
refunds for the entire class of taxpayers with non-Arizona dividends.
Judge Dougherty of the Tax Court found the statute
unconstitutional. On advice from the
Attorney General’s Office, DOR ceased to defend the statute. However, the Judge further ruled that a
class existed and ruled that the class was all taxpayers for the years 1986
through 1989 who had dividends. DOR
appealed the portion of the ruling on the class action declaration and the
Arizona Court of Appeals agreed with DOR.
The Arizona Supreme Court overturned that decision on August 29, 2001
and reinstated the class action.