U.S. Supreme Court hears D&G Bond Tax Constitutionality Case
May 19, 2008: As reported in The Wall Street Journal on September 6, 2006 (“Kentucky Suffers Setback in Muni-Bond Tax Case”), Donaldson & Guin, LLC “recently won a courtroom battle in a case that is stirring widespread interest among municipal-bond investors and state government officials.” D&G brought several cases, including Davis v. Dept. of Rev. of State of Kentucky and Dunn v. State of North Carolina, asserting that Kentucky, North Carolina and other states violate the Commerce Clause of the United States Constitution by imposing an income tax on interest earned on municipal bonds issued in other states, while exempting from income tax the interest earned on in-state bonds.
The Kentucky trial court initially ruled against us, but we appealed and the Kentucky Court of Appeals overturned the trial court’s decision. The Kentucky Supreme Court then refused to review the opinion by the Kentucky Court of Appeals.
In North Carolina, the trial court certified a class of taxpayers and the State appealed to the North Carolina Court of Appeals. On October 17, 2006, the North Carolina appellate court rejected the State’s arguments and affirmed the trial court’s class certification decision. The North Carolina Supreme Court let our opinion stand.
We took our Kentucky case all the way to the United States Supreme Court. The case was argued in November 2007 and was decided in May 2008. In a split decision, the Court questioned (but did not decide) the constitutionality of disparate taxation for “private activity” bonds that local governments use to subsidize private businesses, but found disparate treatment for bonds issued to fund traditional government services to pass constitutional muster. Read the opinion here.
