Fights over taxes usually find credit unions and the U.S. government on opposite sides. But the Justice Department has taken the unusual step of filing briefs in a tax case on the side of a credit union in its battle with its state tax authority.
The Poughkeepsie, N.Y.-based $2.7 billion Hudson Valley Federal Credit Union has taken the State of New York to court over a tax that the state applies to recording mortgages. The credit union contends that as a federally chartered credit union, it should not have to pay the state tax. The state has countered with the observation that the CU has not yet exhausted its administrative remedies to the tax and argued that the tax is not on the credit union but on the mortgage borrower.
Oral arguments before the Supreme Court of the State of New York have been scheduled for April 13.
"We consider our case very strong, and we are hopeful for a positive outcome," said Dale Lois, partner in the law firm of Quartararo & Lois, the credit union's law firm headquartered in Fishkill, N.Y. "Either at this level or certainly on appeal."
Lois considered the case so strong because the credit union has pointed to what he said is a very clear set of precedents recognizing federally chartered credit unions as instrumentalities of the federal government. He also noted that credit unions were made tax exempt as part of the government's effort to bring affordable financial products and services to lower and middle-income people.
Since part of the point of making credit unions tax exempt was to lower the cost of financial products like mortgages, Lois argued, its immaterial whether the borrower pays the mortgage recording tax directly or whether the credit union pays it for them or folds the cost into the cost of the mortgage.
In its filing in the case, the Justice Department agreed with the CU. Federally chartered credit unions are "instrumentalities of the United States and may not be taxed absent a specific waiver," the department argued in its filing. "Therefore, unless the State of New York can demonstrate that Congress has specifically waived immunity for the mortgage tax at issue, the tax is barred by the doctrine of sovereign immunity," it added.
Although it may seem like this is a case primarily over principle-are federally chartered credit unions in New York subject to state mortgage recording tax or not-the filings reveal that a good sum of money is at stake as well. Although Lois indicated the cost of the tax is difficult to quantify from year to year, if Hudson Valley wins the case it stands to recoup more than $1.8 million in previously filed mortgage recording taxes.
For its part, New York attacked the notion that federally chartered credit unions are instrumentalities of the federal government for purposes of these taxes.
"In order for plaintiff to be a federal instrumentality, the activity taxed must be 'so intimately connected with the exercise of a power or the performance of a duty by the government that taxation of it would be a direct interference with the functions of government itself,' the state argued citing a case called United States vs. New Mexico. "Where this is true, under the supremacy clause, the federal instrumentality is entitled to an implied immunity from the state taxation challenged," the state contended.
But the Justice Department cited McCullough vs. Maryland and other cases to argue for the "longstanding rule that property of the United States, its agencies and its instrumentalities is constitutionally immune from taxation absent express congressional consent to the contrary."
CUNA has also weighed in on the case along with the Credit Union Association of New York drawn, its filing read, by the larger questions that the case raised.
When arguing in favor of Hudson Valley being consider a federal instrumentality, CUNA cited case where the State of North Dakota had tried to impose a sales tax on a federally chartered land bank, an approach which CUNA suggested could render almost everything federally chartered banks or credit unions do subject to state taxes.
NAFCU also weighed in on the matter, arguing that credit unions' activities met the standard for things having a "governmental purpose."