A Mississippi trial court has again found unconstitutional the state’s dividend exclusion statute, which disadvantages certain multistate taxpayers as compared to solely Mississippi taxpayers. This result comes from AT&T’s 16-year effort to attack two statutes that denied it benefits available to taxpayers doing all of their business in Mississippi. A number of cases in the administrative appellate pipeline present the same issue(s) as AT&T, stemming from audit positions firmly maintained by the Mississippi Department of Revenue (“MDOR”), and have been held in abeyance pending a decision from the state’s highest court. The recent trial court decision discussed here appears to present the vehicle for resolution of these constitutional questions.

Background. MDOR audited AT&T’s Mississippi income tax returns for the tax years 1993 through 1996, and as a result, on January 5, 1999, assessed $5,105,038 in additional tax. The primary adjustment made by MDOR was to change the AT&T affiliated group’s method of computing tax for 1994-96 from a consolidated method to a combined method because the Mississippi multistate taxation laws only allowed consolidation for affiliated groups doing all of their business in Mississippi. If any member of the affiliated group was doing business outside Mississippi, as was the case with AT&T, the group was required by statute and regulations to use the combined method of reporting. The combined method does not allow intercompany transactions to be eliminated, resulting in the inclusion of, among other things, any intercompany gains or dividends in the recipient companies’ gross incomes. AT&T’s inability to exclude such intercompany dividends and/or to eliminate intercompany transactions resulted in the issuance of the audit assessment.