Board: Pension Payout Subject To Arizona Tax

August 19, 2003 ( - Income earned from an out-of-state pension is still subject to personal income taxes for Arizona residents.

>The Arizona Board of Tax Appeals ruled residents of Arizona are subject to income tax on all income wherever derived.   To arrive at this determination, the board drew a distinction between federal and state employees and thus was able to differentiate between this case and the US Supreme Court’s determination in Davis v Michigan Department of Treasury, according to Washington-based legal publisher BNA.

>In the Supreme Court case, it was determined that federal employees were protected from such taxation, which the plaintiff held that Michigan’s practice of taxing federal pensions while exempting state pensions violated the intergovernmental tax immunity doctrine.

>However, the board rejected this argument, noting that before the Davis case, Arizona exempted state retirement benefits, but taxed federal pension income. To comply with the Davis ruling, the board explained, Arizona amended its laws to extend the income tax exclusion to federal pensions. Yet, the exclusion does not extend to Michigan pensions, the board said.

>Moreover, the intergovernmental tax immunity doctrine prohibits states from taxing federal employees in a discriminatory manner. In this case, the plaintiffs are not federal employees and thus, the doctrine does not apply to them, the board said, upholding the assessment.

The case is Resteiner v. Arizona Department of Revenue (No. 1890-03-I).