In a 3-2 decision in Zilka v. Tax Review Board, the Pennsylvania Supreme Court upheld the Commonwealth Court and sided with the City of Philadelphia Department of Revenue in a case addressing whether a City resident was entitled to a credit for state-level taxes paid to Delaware.

During the tax years at issue, the taxpayer was a resident of Philadelphia who worked full-time in Wilmington, Delaware.  Accordingly, she was subject to state and local tax in Delaware and subject to Pennsylvania Personal Income Tax and City Wage Tax.  Under the Pennsylvania and Philadelphia laws, she was able to claim a credit for Delaware tax against her personal income tax liability.  Likewise, she was able to claim a credit for Wilmington tax against her Wage Tax liability.  The City, however, denied her claim for a credit against Wage Tax based on the tax paid to Delaware that she was unable to use against her Pennsylvania liability.

The taxpayer appealed, arguing that the denial of the credit resulted in unconstitutional double taxation.  The Pennsylvania Supreme Court agreed with the Commonwealth Court that the City’s taxing regime is constitutional and that the City is required by the Constitution to give a credit only for taxes paid to other local jurisdictions, not for state-level taxes.  The court reasoned that any increased tax burden was the result of rate disparities between the various jurisdictions and that, because of her living and work arrangements, the taxpayer was effectively subject to (i) state tax at the Delaware rate and (ii) local tax at the City rate because those rates are higher than their counterparts.

This case is a blow to taxpayers who live in Pennsylvania (and particularly in Philadelphia) but who are subject to income tax in states with which Pennsylvania does not have reciprocity (including Delaware and New York) because those taxpayers are essentially subject to two taxing regimes and may not be able to fully use credits.

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