Inland Revenue Office of the Chief Tax Counsel

Te Tari o te Roia Take Matua

Te Tari Taake
Asteron Centre
55 Featherston Street
PO Box 2198
Wellington 6140
New Zealand

Telephone: 04 890-1500

Facsimile Numbers :
Chief Ta x Counsel: 04 978-1630
Taxpayer Rulings: 04 978-1628
Escalations & Advising : 04 978-1630
Adjudication: 04 978-1630
Public Rulings : 04 978-1633

5 November 2012

Kenneth H. Ryesky, Esq.

PO Box 926
East Northport
NY11731
USA

Dear Sir

Exposure Draft QWB0107: Income tax- is a tax credit allowed for state income
tax paid in the United States of America?

Thank you for your submission on the above draft item.

After careful consideration of all the submissions received, we have now finalised the
item. We enclose a copy of the final item, for your reference.

We would like to thank you for taking the time to write to us. It was really helpful to get
an American perspective on state taxes, especially from someone with such considerable
specialist knowledge and experience. It was particularly useful to understand the
Constitutional context in which states operate.

Once again, thank you for your comments. We appreciate your input on this item.

Yours faithfully

~.
Director, Public Rulings

Encl. QB 12/13: Is a tax credit allowed for state income tax paid in the United States of
America?
 QUESTION WE'VE BEEN ASKED QB 12/13

INCOME TAX - IS A TAX CREDIT ALLOWED FOR STATE INCOME TAX PAID
IN THE UNITED STATES OF AMERICA?

All legislative references are to the Income Tax Act 2007 unless otherwise stated.

This Question We've Been Asked is about ss U 1, U 2, U 3, U 4, U 5, LK 1 and

YA 2 of the Income Tax Act 2007.

Question
1. Is a tax credit allowed for state income tax paid in the United States of
America (United States)?

Answer
2. Subpart U allows a tax credit for state income tax paid on United States-
sourced income, provided the state income tax is of substantially the same
nature as New Zealand income tax.
3. The tax credit allowed cannot be more than the amount of New Zealand
income tax payable on the United States-sourced income.
4. The Double Taxation Relief (United States of America) Order 1983 (the DTA)
does not apply. This is because state income taxes are not covered by the
DTA.

· ·ExpTanation-·---··~ --~- ~----

Background
5. We have been asked to clarify whether a tax credit is allowed for state
income tax paid in the United States. The DTA refers to federal income tax
but does not mention state income taxes. Some taxpayers have taken this
to mean that a tax credit is not allowed for state income tax paid in the
United States.
Discussion
6. A New Zealand resident who derives foreign-sourced income is liable for
New Zealand income tax on that income. However, the New Zealand
resident may be entitled to a tax credit for foreign income tax paid on that
income.

Double Taxation Relief (United States of America) Order l983

7. The DTA does not apply. This is because state income taxes are not covered
by the DTA. However, the fact that the DTA does not cover state income
taxes is irrelevant. Relief is available under subpart U.
14. Section U 2(2) restricts the amount of the tax credit. The tax credit allowed
must not be more than the amount of New Zealand income tax payable on
that foreign-sourced income, as calculated under s U 5.

United States state income taxes

15. Most states in the United States impose a state income tax. The
Commissioner's view is that, for the most part, state income taxes will be of
substantially the same nature as income tax imposed under s BB 1.
16. However, it cannot be assumed that all state income taxes are the same.
Each state income tax needs to be assessed individually each tax year to
determine whether it is of substantially the same nature as New Zealand
income tax. The name or title of the tax is not determinative. The
characteristics of the tax will need to be evaluated and compared with New
Zealand income tax to establish whether it is of substantially the same
nature.
Tax credits relating to attributed controlled foreign company income
17. Section LK 1(1) allows a tax credit for tax paid or payable on an amount of
attributed controlled foreign company income. Tax paid or payable includes
"foreign income tax". The s U 3 definition of "foreign income tax" also
applies to subpart LK, as does s YA 2(5). To this extent, the conclusions in
this item regarding s YA 2(5) apply equally to subpart LK.
Conclusion
18. A tax credit for United States state income tax is allowed under subpart U
provided the state income tax is a tax of substantially the same nature as
New Zealand income tax.
19. The tax credit allowed under s l._i2(:2)-c~~ot- be- moreth~n theam6Umof-- -
New Zealand income tax payable on the United States-sourced income, as
calculated under s U 5.
20. The DTA does not apply. This is because state income taxes are not covered
by the DTA. However, the fact that the DTA does not cover state taxes is
irrelevant.

References
Subject references Legislative references
State income tax Income Tax Act 2007, ss BB 1,
tax credit lJ 1, lJ 2, lJ 3, lJ 4, lJ 5, LK 1, VA 2, YD 1,
United States of America YD 2,YD 4 and sch 27
Double Taxation Relief (United States of
America) Order 1983
 :;

Application of subpart L.J

8. Tax credit relief is available under subpart LJ. Section LJ 1(2) states:
Limited application of rules
(2) The rules in this subpart apply only when.,.-
(a) a person resident in New Zealand derives assessable income sourced from
outside New Zealand; and
(b) foreign income tax is not paid in a country or territory listed in schedule 27
(Countries and types of income with unrecognised tax) to the extent to
which the foreign income tax is paid on the types of income listed in the
schedule.

9. Therefore, to claim a tax credit a person must:

• be resident in New Zealand for income tax purposes (s YD 1 determines
residency for natural persons and s YD 2 determines residency for
companies);
• have derived assessable income that is not sourced in New Zealand
(s YD 4 lists the classes of income treated as having a New Zealand
source); and
• have paid foreign income tax on the assessable income.
10. Section LJ 1(2)(b) states that subpart LJ will not apply if foreign income tax
is paid in a country or territory listed in sch 27. There are currently no
countries or territories listed in sch 27, so this limitation has no effect. A
person who meets the criteria of s LJ 1(2) is entitled to a tax credit for an
amount of foreign income tax paid on the foreign-sourced income
(s LJ 2(1)).
11. Section U 3 defines "foreign income tax"-to mean ''an amount of income tax
of a foreign country". The meaning of "income tax" in subpart LJ is varied
by s YA 2(5):
Tax of other countries
(5) The term income tax, when specifically used in relation to tax of another country,
whether imposed by a central, state, or local government,-
(a) means a tax of substantially the same nature as income tax imposed under
section BB 1 (Imposition of income tax); and
(b) includes a tax, imposed as a collection mechanism for the foreign tax, that
is of substantially the same nature as provisional tax, pay-as-you-earn
(PAYE), resident withholding tax (RWT), or non-resident withholding tax ·
(NRWT).

12. The meaning of "income tax" is therefore varied to include tax imposed by a
central, state or local government, provided the tax is of substantially the
same nature as income tax imposed under s BB 1; or a tax imposed as a
collection mechanism for the foreign tax that is of substantially the same
nature as provisional tax, pay-as-you-earn, resident withholding tax or non-
resident withholding tax.
13. In summary, if a person satisfies the requirements of s LJ 1(2), then they
are entitled to a tax credit or credits for an amount of "foreign income tax"
paid under s LJ 2(1). (The number of credits will depend on the number of
foreign countries and the sources or the nature of the income derived
(ss LJ 4 and LJ 5).) The meaning of "income tax" in this context is modified
by s YA 2(5) to mean a tax (whether imposed by a central, state or local
government) that is of "substantially the same nature" as income tax.
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 1

TO: Team Manager, Technical Services

Office of the Chief Tax Counsel
National Office
New Zealand Inland Revenue Department
[Via E-mail <[email protected]>]

FROM: Kenneth H. Ryesky, Esq.

RE: Consultation QWB0107: Income Tax -- Is a tax credit allowed for state income tax paid in
the United States of America?

I. INTRODUCTION:

The New Zealand Inland Revenue Department has posted for public consultation an
Exposure Draft on the question of whether, under the New Zealand tax laws, State income taxes
paid in the United States of America (USA) qualify as credit against the New Zealand Income
Tax. 1 This Commentary is accordingly submitted.

II. COMMENTATOR'S BACKGROUND & CONTACT INFORMATION:

Background: The Commentator, Kenneth H. Ryesky, Esq., a USA resident and citizen, is
an attorney who has been admitted to the Bars to practice before the courts in the States of New
York, New Jersey and Pennsylvania, and also before the United States Supreme Court. He is
also an Adjunct Assistant Professor, Department of Accounting and Information Systems,
Queens College of the City University of New York (CUNY), where he teaches Business Law
courses and Taxation courses. Prior to entering into the private practice of law, Mr. Ryesky
served as an Attorney in the employ of the United States Internal Revenue Service (IRS). In
addition to his law degree (JD, Temple University, 1986), Mr. Ryesky holds a BBA degree
(Temple University, 1977), a MBA degree (La Salle University, 1982) and a MLS degree
(Queens College CUNY, 1999). He has authored several scholarly articles and commentaries on
taxation, including one particular article 2 made part of the printed record of a hearing conducted
before the United States Senate Finance Committee, 3 and also cited in a report by Her Majesty's
Treasury's Office of Tax Simplification.4

1
New Zealand Department of Inland Revenue, Office Of Chief Tax Counsel, Exposure Draft QWB0107
<http://www.ird.govt.nz/resources/a/9/a9a64f004c8777c382f2f75f0fc5c95c/qwba0107.pdf>.
2
Kenneth H. Ryesky, Tax Simplification: So Necessary and So Elusive, 2 PIERCE L. REV. 93 (2004)
<http://www.piercelaw.edu/assets/pdf/pierce-law-review-vol02-no2-ryesky.pdf>.
3
Tax: Fundamentals in Advance of Reform, Hearing before the Committee on Finance, U.S. Senate,
110th Congress, 2nd Session, April 15, 2008, S. Hrg. 110–1037, pp. 113 - 150
<http://finance.senate.gov/library/hearings/download/?id=fead52be-a791-4105-96da-0010264cd7ed>.
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 2

Contact Information: Kenneth H. Ryesky, Esq., Department of Accounting &

Information Systems, 215 Powdermaker Hall, Queens College CUNY, 65-30 Kissena Boulevard,
Flushing, NY 11367, USA. Telephone 718/997-5070; E-mail: [email protected] or
[email protected].

Disclaimer: This Commentary reflects the Commentator's personal views, is not written
or submitted on behalf of any other person or entity, and does not necessarily represent the
official position of any person, entity, organization or institution with which the Commentator is
or has been associated, employed or retained.

III. COMMENTARY ON THE ISSUES:

A. The Implications of Statehood in the USA:

Though New Zealand and the USA share a common English colonial heritage and
background, each of the two nations has gone its own special and unique route in developing its
respective political and legal systems. Those political subdivisions in the USA which are known
as "States" 5 are quite different, politically and legally speaking, from New Zealand's current
Regions or Territorial Authorities (and even from New Zealand's Provinces under its former
political structure).

In the USA, the concept of "statehood" is rooted in the fact that each of the thirteen
original States 6 was formerly a separate British colony, and insisted upon retaining its
sovereignty even after secession from the British Crown. State rights and State sovereignty have
always figured into the legal and political history and operations of the USA. The dichotomy
between State sovereignty and a central Federal government created great tensions, which caused
considerable friction during the USA's Formative Period culminating in the Civil War 7 (1861 -

4
Her Majesty's Treasury, Office of Tax Simplification, Review of Tax Reliefs, Interim Report, pp 9 - 10
(December 2010) <http://www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_interim_report.pdf>.
5
Four such "States," namely, Kentucky, Massachusetts, Pennsylvania and Virginia, officially denote
themselves as "Commonwealths," a nomenclatural distinction with no practical or functional difference.
6
The thirteen original Colonies-cum-States were, in alphabetical order: Connecticut, Delaware, Georgia,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode
Island, South Carolina, and Virginia. Except as may be necessary to elucidate the discussion, this
Commentary shall not dwell upon subsequent creations of additional States.
7
The American Civil War is often referred to as the "War Between the States."
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 3

1865). 8 Even after the Civil War established the primacy of a strong central Federal
government, State sovereignty continues to play a significant role in the USA's legal and political
existence.

State sovereignty and States' rights manifest themselves in many ways. Imprimis, the
United States Constitution specifically limits the Federal government's power by reserving for
the States or the populace all powers not delegated to the Federal government by the States under
the Constitution. 9

Accordingly, Federal courts of law are courts of limited jurisdiction, and the tribunal's
jurisdiction must be established by the party seeking to invoke such jurisdiction. 10 And while
one basis for a Federal court's jurisdiction is that of a question arising under the statutes and
Constitution of the USA, 11 the Federal courts also have jurisdiction to entertain disputes which
arise between citizens of diverse States. 12

State courts, on the other hand, can have broad jurisdictional powers such that their
jurisdiction over a given matter is presumed unless and until rebutted. 13

While the United States Constitution specifically authorizes the Federal government to
establish "uniform Laws on the subject of Bankruptcies throughout the United States," 14 the
individual States are permitted to prescribe their own lists of property exempt from the Federal
bankruptcy process. 15

8
See Roscoe Pound, The Formative Era of American Law (Little, Brown & Co., Boston, 1938).
9
U.S. Constitution, Amendment X.
The first ten Amendments to the USA Constitution, collectively known as the Bill of Rights, were
promised as a condition for the Constitution's ratification by the Massachusetts, New York and Virginia
delegations.
10
See, e.g. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994); Federal Rule of
Civil Procedure 8(a)(1).
11
U.S. Constitution, Art. III, § 2; 28 U.S.C. § 1331.
12
U.S. Constitution, Art. III, § 2; 28 U.S.C. § 1332.
13
E.g., Condon v. Associated Hospital Service of New York, 287 N.Y. 411, 415, 40 N.E.2d 230,
232 (1942); County School Board v. Snead, 198 Va. 100, 107, 92 S.E.2d 497, 503 (1956).
14
U.S. Constitution, Art. I, § 8.
15
11 U.S.C. § 522(b); see also In re Worthington, 28 B.R. 736 (Bankr. W.D. Ky. 1983).
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 4

The United States Supreme Court, while normally an appellate tribunal, has original
jurisdiction as the court of first instance in boundary disputes and other controversies between
States, 16 another manifestation of the special status of States.

While the Federal government has broad authority to impose its legislative schemes upon
individuals, it has no authority to commandeer the States' sovereignty by compelling them to
enforce Federal legislative schemes. 17

As for capital punishment for murder, some States in the USA provide for the death
penalty while others do not, and the standards and applications for the death penalty often vary,
within limits, amongst those States that do have active death penalty legislation. 18

Under the so-called "Erie Doctrine," Federal courts in the USA must look to the law of
the relevant State in all matters not specifically delegated under the Constitution, and where the
particular question has been ruled upon by the highest State court, the Federal courts are required
to abide by that ruling. 19 The Bosch Corollary to the Erie Doctrine extends this principle to the
Federal administrative agencies, including the Internal Revenue Service. 20

In matters of Federal taxation, the law of the relevant State determines parties' rights and
obligations, and the Federal tax law is applied to such rights and obligations as they are
determined under State law. 21

In the USA, then, the States as sovereign political entities function in many respects as
equals or superiors to the Federal government, and not necessarily as subservients in a lord-
vassal type relationship.

16
28 U.S.C. § 1251; see also New Jersey v. New York, 526 U.S. 589 (1999).
The protracted and contentious boundary dispute litigation between New Jersey and New York
was occasioned by each State's respective unabashed designs on the realty tax and sales tax revenues
exactable from the tourist attraction establishments and visitor traffic at the Statue of Liberty and Ellis
Island. See New Jersey v. New York, 523 U.S. 767, 778 and n. 12 at 792 (1998).
17
Printz v. United States, 521 U.S. 898 (1997); New York v. United States, 505 U.S. 144 (1992).
18
See, e.g. Blystone v. Pennsylvania, 494 U.S. 299 (1990), see also Evan J. Mandery, Federalism
and the Death Penalty, 66 Albany L. Rev. 809 (2003).
19
See Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).
20
See Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).
21
See, e.g. United States v. Craft, 535 U.S. 274 (2002); United States v. Barczyk, 434 Fed. Appx. 488
(6th Cir. 2011), cert. denied ___ U.S. ___, 132 S. Ct. 1118, 181 L. Ed. 2d 981 (2012); Kean v.
Commissioner, 407 F.3d 186 (3d Cir. 2005); Estate of Metzger v. Commissioner, 100 T.C. 204 (1993),
aff'd 38 F.3d 118 (4th Cir. 1994).
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 5

B. The Federal Income Tax in the USA:

As a means to finance the Civil War, the United States Congress enacted income tax
legislation in 1861 and in 1862. 22 These provisions and subsequent similar ones were found by
the United States Supreme Court to be unconstitutional, and thus were invalidated. 23 The 16th
Amendment to the United States Constitution, ratified in 1913, mooted those Constitutional
infirmities, and, notwithstanding several recasts of (and numerous amendments to) the United
States Internal Revenue Code, 24 the 16th Amendment remains the basis for the income tax as it
exists today in the USA.

It is far beyond the scope of this Commentary to give exacting detail of the personal
income tax in the USA; suffice it to say that it is a tax imposed upon individuals' personal
income, 25 after the application of the appropriate exemptions and deductions. Those subject to
the tax are expected to timely file and pay the tax in the first instance, without compulsion by a
government agent. 26 The initial filing by the taxpayer constitutes a self-assessment of the
income tax, 27 which stands unless and until it is adjusted by the IRS after audit 28 or by the
taxpayer himself/herself through an amended return. 29

22
Act of August 5, 1861, 12 Stat. 292, 309; Act of July 1, 1862, 12 Stat. 432, 473 - 475.
23
Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895).
24
The Internal Revenue Code is codified at Title 26 of the United States Code. The common accepted
convention among the taxation bar and many courts is to cite the Internal Revenue Code as "I.R.C."
instead of "26 U.S.C." By analogous convention, regulations issued by the Treasury Department pursuant
to the Internal Revenue Code, codified in Title 26 of the Code of Federal Regulations, are cited as "Treas.
Reg." instead of "26 C.F.R."
25
There is also an income tax imposed upon corporations, specifics of which lie all the more beyond the
scope of this Commentary.
26
See e.g. United States v. Kloda, 133 F. Supp. 2d 345, 347 (S.D.N.Y. 2001); see also Internal Revenue
Service, Pub. 1273, Guide to the Internal Revenue Service for Congressional Staff at 4 (January 1996)
(SuDoc No. T22.44/2: 1273/996).
It is not mandatory that the taxpayer even pretend to find pleasure in the process. Belli v.
Commissioner, T.C. Memo 1989-403 ("Expressing one's feelings about the IRS ... is not an element of tax
fraud; if it were, our Federal prisons undoubtedly would be brimming with such 'tax convicts.' We fail to
discern any requirement that taxpayers must enjoy or look forward to paying their taxes.").
27
I.R.C. § 6501(a)(1); Moroney v. United States, 352 F.3d 902, 906 (4th Cir. 2003).
28
For Fiscal Year 2011, the overall IRS audit rate for individual tax returns was 1.1% of the total tax
returns filed; approximately one-fourth of which were the so-called "field audits" entailing an in-person
meeting with an IRS agent, and the remaining three-fourths of which audited through correspondence.
I.R.S., Data Book 2011, Publication 55B (rev. March 2012), p. 22, <http://www.irs.gov/pub/irs-
soi/11databk.pdf>.
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 6

Though the personal income taxation regimes of New Zealand and the USA differ from
one another in the details of tax rates, items excluded and exempted, and relevant administrative
procedures, the tax systems of the two nations are, at their cores, conceptually quite similar. 30

C. State Income Taxes:

Most of the States in the United States impose taxes upon the income of their residents,
and/or upon income earned within the State by non-residents. The tax schemes of the respective
States are very analogous to the Federal personal income tax scheme, and indeed, the typical
State income tax scheme uses the taxpayer's Federal items of income and deduction as a starting
point for the computation of the Tax. 31 While the State rates, tax brackets and administrative
procedures may differ from the Federal income tax, the State income tax is, in structure, of the
same nature as the Federal income tax.

Some cities and other political subdivisions within the various States also impose income
taxes which are analogous to the Federal income tax. Typical of these (though hardly the sole
example) is the City of New York, which, under statutory authority granted by the New York
State Legislature, 32 imposes an income tax, over and above the income taxes imposed by the
State of New York and the Federal government. 33

29
There are, of course, provisions for the IRS to assess taxes where the taxpayer fails to comply with his or
her duty to file. I.R.C. § 6020.
30
Even in the excuses proffered by unenthusiastic obligees of the tax who seek to evade their payment
obligations. Cf., e.g. O'Toole v. Commissioner, T.C. Memo. 2002-265 (rejecting petitioner's claim that
the IRS assessment was invalid because it omitted the apostrophe in his surname) with Commissioner of
Inland Revenue v. Boyton, 2001 NZDCR LEXIS 170, [2001], D.C. REG. 1126 (Dist. Ct. Upper Hutt,
2001) (rejecting defendant's argument that the New Zealand Inland Revenue assessment was invalid
because it spelled his name "Craig Gordon Boyton" instead of ''Craig-Gordon: Boyton'' (with hyphen and
colon as indicated)); cf., e.g. Marsh v. Commissioner, T.C. Memo. 2000-11, aff'd 2002 U.S. App. LEXIS
1354 (9th Cir. 2002) (rejecting tax protester argument that native Hawaiians are not obligated to pay
taxes); Avery-Carter v. Commissioner, T.C. Memo 1993-598 (same, African-American); Hill v.
Commissioner, T.C. Memo 1995-301 (same, Native American) with Kaihau v. New Zealand Inland Rev.
Dept. [1990] 3 NZLR 344 (Highcourt, Auckland, 1990) (rejecting tax protester's argument that he is
exempt from New Zealand taxation because he is a Maori).
31
E.g., Massachusetts General Laws, Chapt. 62; New Jersey Gross Income Tax Act, N.J. Stat. § 54A:1-1
et seq.; New York Tax Law, Art. 22; 72 Pennsylvania Statutes, Chapt. 5, Art. III, 72 P.S. §§ 7301 et seq.
32
New York Tax Law, Art. 30, §§ 1300 et seq.
33
New York City Administrative Code, Chapt. 17.
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 7

States and their cities and other subdivisions may tax the incomes of nonresident (and
resident) Federal employees who are employed on Federal property within the state (or city). 34

The IRS and the State and City taxation authorities regularly exchange and compare
information regarding taxpayers, so that the Federal and the State income tax administration can
be coordinated. 35

D. Income Taxation in the District of Columbia:

The District of Columbia is a territory which is geographically coterminous with the City
of Washington, and is the seat of the Federal government of the USA. The United States
Congress wields jurisdiction and control over the affairs of the District to an extent not
Constitutionally permissible with respect to the States. 36 This includes the power to impose
locality-specific taxes upon the residents. 37

While retaining the right and power to exercise its legislative prerogatives over the
District, the U.S. Congress has delegated the governance of the District to a Mayor and to the
Council of the District of Columbia, a legislative body analogous to the State legislatures in the
USA. 38 This governing body has enacted an income tax provision, analogous to the Federal
income tax, for residents of the District (who also are subject to the Federal income tax). 39

E. State Sales & Use Taxes:

Most of the States impose sales taxes. This impost is added to the purchase price of
goods sold, and is typically collected by the merchant who sells the goods. The merchant, in
turn, remits the sales tax to the state taxation authorities.

34
Thompson v. Lennox, 258 F.2d 320 (3d Cir. 1958), cert. denied 358 U.S. 931 (1959).
35
See I.R.C. § 6103(d); Internal Revenue Manual, Part 11.3.32 <http://www.irs.gov/irm/part11/irm_11-
003-032.html>.
Delinquencies detected through this Federal-State coordination have been known to include those
of at least one of the very officials who effect the coordination, see Smith v. United States, 964 F.2d 630
(7th Cir. 1992), cert. denied 506 U.S. 1067 (1993).
36
U.S. Constitution, Art. I, § 8, clause 17; see also Cohen v. Virginia, 19 U.S. 264 (1821).
37
Loughborough v. Blake , 18 U.S. 317 (1820).
38
District of Columbia Self-Government and Governmental Reorganization ("Home Rule") Act, Public
Law No. 93-198, 87 Stat. 774 (1973).
39
D.C. Code, Title 47, Chapt. 18, Subchapt. VI.
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 8

States that impose a sales tax also impose a use tax upon goods purchased out-of-State
and brought into the State for use. The amount of the tax is equal to the shortfall, if any, of the
sales tax actually paid out-of-State from the amount of sales tax which would have been paid had
the sale occurred in the State. The obvious purpose of such a tax is to remove the tax advantage
inherent in State residents making purchases out-of-State where lower sales tax rates apply,
thereby protecting both the State's entrepreneurial merchants and State's tax revenue (not
necessarily in that order of priority on the State legislature agenda).

Some States, including but not limited to Florida and Texas, impose no State income tax,
but do impose a sales tax and corresponding use tax (usually at a higher rate than the average
State sales tax). This formerly placed residents of States imposing no income tax at a
disadvantage, inasmuch as they could not claim the State income tax deduction in the
computation of their Federal income tax. This inequity has now been remedied, and since 2004,
taxpayers now have the choice of deducting State general sales taxes or State income taxes in
determining their taxable income for Federal purposes. 40

F. The USA Taxes as they Relate to the New Zealand Taxation Scheme:

That New Zealand's Double Taxation Relief (United States of America) Order 1983
(DTA) does not specifically mention income taxes paid to one or more States in the USA is of no
moment. Section YA 2(5) of the New Zealand Income Tax Act of 2007, which applies to
subpart LJ, specifically includes taxes "imposed by a central, state, or local government."
Subpart LJ accordingly provides for the tax credit, regardless of whether the DTA does or does
not.

Moreover, the State and Federal governments in the USA have a mutually symbiotic
existential, operational and Constitutional relationship, such that one cannot operate in a vacuum
without regard to the existence and operations of the other. An income tax imposed by a State
(or locality) in the USA can therefore be said to be a tax "of" the USA, and therefore an "income
tax of a foreign country" as specified in Section LJ 3.

As detailed above, the income tax imposed by the District of Columbia is all the more
directly imposed under the authority of the United States Congress.

Additionally, because the taxes imposed by cities and other subdivisions of States in the
USA are imposed under the legislative authority of the State governments, these local taxes are
also State taxes.

Sales taxes imposed by the States would not seem to currently qualify for the tax credit
under Subpart LJ; remedial legislation analogous to Section 501(a) of the American Jobs
40
American Jobs Creation Act of 2004, Public Law 108–357, § 501(a), 118 Stat. 1418, 1520 - 1521
(2004), codified at I.R.C. §§ 164(a) & 164(b)(5).
 Kenneth H. Ryesky, Esq: New Zealand IRD Consultation QWB0107 Page 9

Creation Act of 2004 would be necessary if and when the Parliament of New Zealand sees fit to
place sales and use taxes imposed by individual States of the USA on par with income taxes
imposed by the States.

IV. CONCLUSION:

Income taxes paid in the USA, whether to the Federal, State or local government, qualify
as credits with respect to the New Zealand Income Tax Act of 2007, provided that they otherwise
fulfill the requisites applicable to claiming the credit, and to the extent that such payments do not
exceed the relevant monetary limitations.

9 September 2012
Respectfully submitted,

Kenneth H. Ryesky, Esq.