The U.S. Supreme Court today unanimously held that West Virginia law that taxes the federal pension benefits of a retired U.S. Marshals Service employee—whereas the pension benefits of certain former state and local law enforcement employees were exempt from state taxation—violates the intergovernmental tax immunity doctrine under 4 U.S.C. section 111.
The case is: Dawson v. Steager, No. 17-419 (S. Ct. February 20, 2019). Read the Supreme Court’s opinion [PDF 95 KB]
The taxpayer retired from the U. S. Marshals Service, and West Virginia (his home state) taxed his federal pension benefits as it does all former federal employees. However, the pension benefits of certain former state and local law enforcement employees were exempt from state taxation. The taxpayer alleged that the state statute violated the intergovernmental tax immunity doctrine under 4 U.S.C. section 111 (the provision under which the United States consents to state taxation of the pay or compensation of federal employees, but only if the state tax does not discriminate on the basis of the source of the pay or compensation).
The state trial court found no significant differences between the taxpayer’s job duties as a federal marshal and those of the state and local law enforcement officers exempted from taxation and held that the state statute violated the anti-discrimination provision. The West Virginia Supreme Court of Appeals reversed, finding that the state tax exemption applies only to a narrow class of state retirees and was never intended to discriminate against former federal marshals.
Today, the U.S. Supreme Court reversed. In remanding the case back to the lower court, the Supreme Court found that the West Virginia statute unlawfully discriminates against the taxpayer contrary to the provisions under 4 U.S.C. section 111 and that a state violates section 111 when it treats retired state employees more favorably than retired federal employees and no “significant differences between the two classes” justify the differential treatment.
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.