Fent v. STATE EX REL. OKLAHOMA TAX COM'N

99 P.3d 241

2004 OK 59

Jerry R. FENT, as a resident taxpayer, citizen, and voter of the State of Oklahoma, and all other similar taxpaying persons, Plaintiff/Appellant, v. STATE of Oklahoma, ex rel. OKLAHOMA TAX COMMISSION; Thomas E. Kemp, Jerry B. Johnson and Connie Kirby, in their official capacity as Oklahoma Tax Commissioners; and Robert A. Butkin, in his official capacity as the Oklahoma State Treasurer, and/or all their successors in office, Defendants/Appellees.

No. 99,480.

Supreme Court of Oklahoma.

July 6, 2004.

Rehearing Denied October 11, 2004.

Robert T. Keel, Oklahoma City, OK, for Plaintiff/Appellant.

Scott D. Boughton, Assistant Attorney General, Office of the Attorney General, Oklahoma City, OK, for Defendant/Appellee Robert A. Butkin, in his official capacity as the Oklahoma State Treasurer.

Cara S. Nicklas, Assistant General Counsel, Oklahoma Tax Commission, for Defendants/Appellees State of Oklahoma ex rel. Oklahoma Tax Commission and Thomas E. Kemp, Jr., Jerry B. Johnson and Connie Irby, in their official capacities as Oklahoma Tax Commissioners.

¶ 0 The plaintiff sought a declaratory judgment that Oklahoma's earned income credit statute, 68 O.S.2001 § 2357.43, is unconstitutional. The district court of Oklahoma County, Honorable David M. Harbour, rendered judgment on the legal merits in favor of defendants as to the plaintiff's failure to state claims for declaratory relief and writ of injunction and/or mandamus. The trial court ruled that Oklahoma's Earned Income Tax Credit is constitutional and legal. The Court of Civil Appeals affirmed the trial court.

CERTIORARI PREVIOUSLY GRANTED; OPINION OF THE COURT OF CIVIL APPEALS IS VACATED; TRIAL COURT AFFIRMED.

HARGRAVE, J.

¶ 1 Plaintiff/appellant Jerry R. Fent, as resident taxpayer, citizen and voter of the State of Oklahoma filed an action in district court seeking a declaratory judgment that Oklahoma's Earned Income Tax Credit statute, 68 O.S.2001 § 2357.43, is unconstitutional, and sought a writ of injunction and/or mandamus. Plaintiff filed a motion for summary judgment, and the State Treasurer filed a motion to dismiss on the grounds that he was not a necessary or proper party defendant. The trial court denied the State Treasurer's Motion to Dismiss and denied the plaintiff's motion for summary judgment. The defendants orally moved to dismiss for failure of plaintiff to state a claim. The trial court rendered judgment on the legal merits in favor of defendants as to the plaintiff's failure to state claims for declaratory relief and writ of injunction and/or mandamus, finding that there were only legal issues to be determined. The trial court ruled that Oklahoma's Earned Income Tax Credit is constitutional and legal. The Court of Civil Appeals, Division III, affirmed, finding that the earned income credit is a tax refund which never became a part of state revenue subject to appropriation. Plaintiff Fent petitioned for writ of certiorari to the Court of Civil Appeals, which was granted on January 20, 2004.

¶ 2 At issue is a new law passed by the legislature during the 2001 legislative session. Title 68 O.S. § 2357.43 provides:

§ 2357.43 State Earned Income Tax Credit

For tax years beginning after December 31, 2001, there shall be allowed to a resident individual or part-year resident individual as a credit against the tax imposed by Section 2355 of this title five percent (5%) of the earned income tax credit allowed under Section 32 of the Internal Revenue Code of the United States, 26 U.S.C. Section 32. However, this credit shall not be paid in advance pursuant to the provisions of Section 3507 of the Internal Revenue Code. If the credit exceeds the tax imposed by Section 2355 of this title, the excess amount shall be refunded to the taxpayer. The maximum earned income tax credit allowable on the Oklahoma income tax return shall be prorated on the ratio that Oklahoma adjusted gross income bears to the federal adjusted gross income. Laws 2001, ch. 383, § 1, eff. July 1, 2001. (editorially renumbered from 68 O.S. § 2357.42 to avoid duplication in numbering).

¶ 3 Congress adopted the federal earned income credit in 1975. Title 26 U.S.C. § 32 allows eligible individuals a credit against the tax imposed under the income tax code for the taxable year an amount equal to the credit percentage of so much of the taxpayer's earned income for the taxable year that does not exceed the earned income amount. This credit is a refundable credit that is to be considered an overpayment under 26 U.S.C. § 6401(b). The United States Supreme Court construed the federal earned income tax credit in Sorenson v. Secretary of the Treasury, 475 U.S. 851, 106 S.Ct. 1600, 89 L.Ed.2d 855, in determining whether the earned income credit refund is exempt from provisions of the Social Security Act that allow "interception" of tax refunds payable to persons who have failed to meet child support obligations that have been assigned to the state. The Supreme Court, in Sorenson, stated:

"Unlike certain other credits, which can be used only to offset tax that would otherwise be owed, the earned-income credit is "refundable." Thus, if an individual's earned-income credit exceeds his tax liability, the excess amount is "considered an overpayment" of tax under § 6401(b) .... subject to specified setoffs, § 6402(a) directs the Secretary to credit or refund "any overpayment" to the person who made it. An individual who is entitled to an earned-income credit that exceeds the amount of tax he owes thereby receives the difference as if he had overpaid his tax in that amount." 475 U.S. at 854, 106 S.Ct. 1600.

¶ 4 Oklahoma adopted the earned income tax credit in 2001. Title 68 O.S.2001 § 2353(3) provides that any term used in the state income tax code shall have the same meaning as when used in a comparable context in the Internal Revenue Code, unless a different meaning is clearly required.

¶ 5 Fent alleges violations of various constitutional provisions: Art. 10 § 14, which provides that taxes shall be levied and collected by general laws and for public purposes only; Art. 10 § 15, which provides that the State shall not make donation by gift, subscription to stock, by tax or otherwise, to any company, association or corporation; Art. 5 § 51 which provides that the legislature shall pass no law granting to any association, corporation or individual any exclusive rights, privileges or immunities within this State; Art. 10 § 19 which provides that every act enacted by the legislature levying a tax shall specify distinctly the purpose for which said tax is levied and no tax levied and collected for one purpose shall ever be devoted to another purpose.

¶ 6 Fent argues that the state income tax is for the purpose of providing revenue for general governmental functions and that this statute permits the use of income tax revenues to make "direct gifts to the poor." Plaintiff argues that the federal earned income tax credit is not a tax refund at all, but is social welfare legislation to pay cash. He says that the earned income credit is not a refund because it is not a refund of taxes paid or withheld.

¶ 7 The issue before us concerns not the levying of a tax, but the adoption by the legislature of a tax credit. We have held previously that deductions to be allowed in computing net income depend entirely on the legislative will and must be clearly expressed. In re Levy, 1939 OK 355, 94 P.2d 537, syllabus by the Court. Deductions from gross income are a matter of legislative grace, and whether they are allowable [to the taxpayer] depends upon the statute. Green v. Oklahoma Tax Commission, 1940 OK 360, 107 P.2d 180, 181. The same rationale applies to tax credits enacted by the legislature.

¶ 8 Oklahoma's Constitution gives to the legislature the power not only to select the subjects of taxation, but to impose different tax classifications. Art. 10 § 13, Okla. Const. provides: "The State may select its subjects of taxation, and levy and collect its revenues independent of the counties, cities or other municipal subdivisions." Article 10 § 12 provides:

§ 12. Special forms of taxation-Amounts-Reference to Federal taxation.

The Legislature shall have power to provide for the levy and collection of license, franchise, gross revenue, excise, income, collateral and direct inheritance, legacy, and succession taxes; also stamp, registration, production or other specific taxes.

In the exercise of the powers provided for in this section, and notwithstanding any other provision of this Constitution, the Legislature may, with or without exceptions, modifications, or adjustments, define the amount on, in respect to, or by which any such tax or taxes are imposed or measured a) by reference to any provisions of the laws ... of the United States, as such laws may be or become effective at any time or from time to time; b) by reference to any amount or amounts finally ascertained in determining amounts subject to taxation by the United States; or c) by reference to any amount or amounts of tax finally ascertained to be payable to the United States.

¶ 9 The State may classify persons and the origin of their incomes, and may apportion deductions or exemptions, provided the classifications and apportionment are reasonable and related to the object of taxation. Walker v. Oklahoma Tax Commission, 1945 OK 264, 164 P.2d 242, 243, syllabus of the Court. All that is required is that there be reasonable classification and reasonable opportunity for uniform or equal incidence upon the classes created. McCutchan v. Oklahoma Tax Commission, 1942 OK 416, 132 P.2d 337, 339. The determination by this Court is whether our legislature has "classified reasonably and has set up a system designed to operate with reasonable uniformity and equality on the given classes." Id.

¶ 10 The state, through the legislature, may select its subjects of taxation and classify them, and they may tax one subject or class and...