The US Supreme Court heard oral arguments Monday in Dawson v. Steager, which questions how the West Virginia tax code will affect federal employees.
James Dawson retired from the US Marshal Service in 2008 and filed under West Virginia code 11-21-12(c)(6) to have his retirement income exempted from taxes as a former law enforcement officer under the statute. The West Virginia Tax Commissioner rejected this exemption, which led Dawson to file this suit in 2015 against the tax commissioner.
Dawson alleges that West Virginia’s code is in violation of 4 USC § 111, which allows states to tax federal employees as long as such taxation does not discriminate against federal employees. The Circuit Court of Mercer County found for Dawson that West Virginia’s tax was discriminatory, but the West Virginia Court of Appeals reversed, finding that the exemption was only given to a narrow class of individuals and was not intended to discriminate against federal employees specifically.
The Supreme Court first heard arguments on behalf of Dawson both from Dawson’s counsel and from an Assistant to the Solicitor General at the Department of Justice. Both of these arguments focused on the facially discriminatory nature of the Tax Commissioner’s ruling. They argued that the duties of a US Marshal were substantially similar to the duties of a state law enforcement employees under the statute and to refuse exemption to federal employees would be discriminatory and contrary to the Court’s precedent. The justices questioned whether the state had an obligation to grant a favored exemption where a federal employee shared traits with both the exempt and non-exempt class. The court also questioned why the plaintiffs were requesting the case be remanded to West Virginia, to which the plaintiffs argued that even if the court ruled in their favor, West Virginia would still need to rule on whether Dawson was a valid employee to receive the exemption.
The Supreme Court then heard arguments from the West Virginia Solicitor General, Lindsay See. See argued that the state plan does not explicitly discriminate against federal employees but is instead based on a three factor test related to benefits received, contributions paid into the retirement plan, and the plan being exclusive to law enforcement officers. The court questioned the logic of this as the statute only refers to state employees and does not contain any of the nuance argued by See.
This case now awaits a decision from the Supreme Court but will provide important insight into state taxation of federal employees however the court rules.