More of this Feature • Main Menu • Chapter 1 • Chapter 2 • Chapter 3 • Chapter 4 • Chapter 5 • Chapter 6 • Chapter 7

Join the Discussion Visit Our Message Forum

Related Resources • SSCRA Simplified • SSCRA Resources • Employment Rights • Military Lawyers

In discussing section 514, the term "state" is intended to include the District of Columbia, possessions, and territories. The term "home state" means the "state of domicile" or the "state of residence," which for the most part have no significant difference in the application of this section. The term "host state" means the state in which the service member is stationed or his/her state of temporary presence when there is no distinction between the two terms. Occasionally, the service member may be stationed in one state where the post is near a state boundary and have his/her quarters in the neighboring state. In such case, the term "state of temporary presence" could refer to both, while "state of station" would refer to the military post.

The constitutionality of this section was upheld by the Supreme Court in the case of Dameron v. Brodhead.

Domicile for purposes of taxation is determined by a myriad of factors, the most important being physical presence in a state and a showing of intent to permanently reside in that state. Some of the most influential factors include where you: live, own real property, have occupational licenses, vote, register your motor vehicle, pay state income and property taxes, maintain your driver’s license, and declare to be your legal residence on court and other legal documents Often states and localities will argue that service members voluntarily registering to vote in a host state under the new “motor voter” laws, or registering their cars for convenience in their host state, have automatically shown intent to change domicile to the home state. A state may not presume a military member’s domicile is the same as their non-military spouse in determining a change of domicile claim.

What do you need to do if you want to change domicle while in military service? If you are a resident of a high tax state and wish to change your domicile to a no income tax state like Alaska, Nevada, Florida or Texas, you must must prove your actual physical presence in the state, and the factors listed above as to intent to make the new state your permanent place of abode. You do not have to stay a resident of the state from which you entered the military service. You can change your state domicile during your military career, provided you are willing to demonstrate physical presence and the intent factors listed above to doubting losing state tax authorities Military members notify the Department of Defense Finance and Accounting Service (DFAS) of their desire to change domicile by filing a DD Form 2058, State of Legal Residence Certificate.

Income tax. Unless it is also the home state, the host state may not tax the compensation a service member receives "for military and naval service" because this compensation "shall not be deemed income for service performed" in the host state. This is a statutory exception to the general rule that income may be taxed where it is earned as well as where the taxpayer is domiciled.

At least one court has determined that a school board cannot charge nonresident service members tuition for children enrolled in the host state public schools. Although the tuition charge was not an income tax or a personal property tax, its effect was the same. Service members would be double taxed by supporting school systems in their states of domicile as well as in the host state. The court determined that the Act was intended to prevent such a situation. Accordingly, it held that the tuition requirement was invalid under the supremacy clause.

Income derived from off-duty employment, on or off post, is not "compensation for military and naval service" and, therefore, does not have the protection of the Act. This leaves off-duty income vulnerable to the general rule that it may be taxed by the state where it is earned and by the home state. If the state where the off-duty income is earned is other than the host state, such as when the soldier works in a state adjoining his/her military post, the host state may not tax the income because the service member is a nonresident with respect to the host state. The host state may only tax nonresidents on income earned within its boundaries.

Section 514 does not protect income earned by dependents of service members. Thus, a nonmilitary spouse’s income might be taxed by (1) the home state, (2) the host state, and (3) the state where the income is earned. If the state where the income is earned is other than the host state, for example, when the duty station is near a state boundary, the only theory upon which the host state could tax is that the dependent acquired a statutory residence in the host state. Attorneys should examine the law of the host state to determine if the dependent, especially the spouse, acquires a residence for tax purposes. Attorneys should determine the length of temporary presence in the host state necessary to qualify as a resident for tax purposes.

A 1994 case shed new light on the scope of the protection afforded by the section. In Fatt v. Utah, the state attempted to tax the military pay of a Native American. The service person was a resident on a reservation within the state. Pursuant to federal law, his income was not taxable by the state. Utah argued unsuccessfully that the income earned while in the Navy in San Diego was income earned off of the reservation. The Utah Supreme Court rejected this argument noting that the SSCRA makes the domicile permanent. Although the court did not expressly address the issue, it is reasonable to conclude that the protection afforded by the SSCRA would apply to all state taxes tied to domicile location within the state.

Although states may not tax a nonresident service member's military income, a number of states take it into account. Kansas, and several other states, including California, have a method that has survived legal challenge. For purposes of calculating the tax bracket of a nonmilitary spouse who earned income in the state, the state adds in the service member's military income to determine a higher tax rate based upon joint income if the couple filed a joint federal return. (Most of these states require individuals to file a joint state return, if they filed a joint federal return.) Although the service member's income is not taxed, the spouse's income is thereby taxed at a higher rate. This practice has been upheld by the Tenth Circuit

In situations where the service member, his/her dependent, or both, are properly subject to taxation by two or more states, the service member and his/her dependents may be eligible for tax credits. Generally, this is a credit against the tax of the home state in the amount of the tax paid to the state where the income was earned. There may be amount limitations or other formulas to determine the amount of the credit. Another form of tax credit occurs when the state in which the income is earned gives the nonresident taxpayer credit for tax on the income paid in the home state. In either case, state statutes are generally worded to prevent the tax credit from being taken twice. Other forms of relief may consist of an exclusion or deduction of the income from the gross income reported to the home state when tax was paid to the state where it was earned, or merely an itemized deduction of the tax paid to the other state.

The authority of the host state to tax the income earned by off-duty personnel or any other persons working or residing on post, regardless of the nature of federal jurisdiction over the post, is contained in the "Buck Act" of 1940.Since employment by a nonappropriated fund activity is not based on military orders, and wages are not paid from appropriated funds, there is no authority for regarding the income derived therefrom as "compensation for military and naval service." Income from nonappropriated funds is derived from services rendered within the host state, and falls under the tax authority given the host state in the Buck Act.

Real property. Real property is excluded from section 514 since it is generally taxed only by the state in which it is situated. Therefore, it is not affected by one's status, whether a domiciliary or a resident, military or civilian.

Tangible nonbusiness personal property. Section 514 states that for purposes of taxation, nonbusiness personal property "shall not be deemed to be located or present in or to have a situs for taxation" in the host state. This section does not, however, extend protection to property owned by the service member's dependents. Examples of, and exceptions to, this general rule follow.

Sales and use taxes. In Sullivan v. United States, the Supreme Court held that section 514 does not exempt service members from sales and use taxes imposed by a state other than the state of domicile.

In Sullivan, the Court determined that sales and use taxes are not imposed on the property itself. Rather, a sales tax is an excise imposed upon the sale transaction, and a use tax is "in the nature of an excise upon the privilege of using, storing or consuming property." Since these taxes are not on the property itself, it does not matter where the property is "deemed" to be in a physical or constructive sense. Congressional action in the Buck Act of 1940 dealt specifically with sales and use taxes. State authorities were authorized to collect such taxes on land subject to Federal jurisdiction, except for sale or use of property sold by the United States or its instrumentalities through a commissary, a ship store, or the like.

The Supreme Court, in Sullivan, in addition to allowing the sales tax, was reluctant to bar the imposition of the closely related use tax, despite the existence of section 514. Section 514 prohibits host state taxes "with respect to personal property, or the use thereof" and "in respect to motor vehicles or the use thereof." The Court held that Congress intended to limit protection of service members' personal property. Only "annually recurring taxes on property--[including] the familiar ad valorem personal property tax," are prohibited.

While the Sullivan case makes it clear that a tax on the sales transaction, whether it is called a sales tax or a use tax, may be imposed by the state, there remains the problem of whether a service member's property is subject to such a tax each time he/she moves the property to a new state. Service members should retain evidence of sales taxes paid on the purchase of major items, if not all items, to avoid further taxation upon relocation. Ordinarily, a credit in the amount of the sales tax paid will be given by the authority imposing the use tax. Because this is strictly a state function, however, which under the Sullivan case is not subject to the protection of section 514, there is no federal assurance that states will grant a credit or exemption for sales taxes paid.

Ad valorem tax. The host state may not impose an ad valorem tax on the nonbusiness personal property of nonresident service members. The right to impose this tax is reserved to the home state. Whether the home state has such a tax or enforces it with regard to service members is of no concern to the host state. The Act's prohibition of taxes of this type is absolute. A municipal tax on such property by the political subdivision of the host state where a service member lives, while actually assigned for duty in another subdivision in the same state, likewise may not be imposed.

Next page > Motor Vehicles > Page 1, 2, 3, 4

Above Information Courtesy of United States Army JAG Corps