On March 28, 1989, the United States Supreme Court published its opinion in Davis v. Michigan Department of the Treasury, 109 S. Ct. 1500 (1989), holding that Michigan's preferential income tax treatment of state and local employee retirement income, which is not given to federal retirement income, discriminates on the basis of the source of income, and is therefore in violation of the doctrine of intergovernmental tax immunity. The Michigan statute considered in Davis exempts from taxation all retirement benefits paid by the state or its political subdivisions, but taxes retirement benefits above a certain amount paid by other employers, including the federal government. See Mich. Comp. Laws Ann. Section 206.30(1)(f)(Supp. 1988). The Court in Davis held that Michigan's inconsistent treatment of retirement benefits violated the doctrine of intergovernmental tax immunity as codified in the Public Salary Act of 1939 (4 U.S.C. 111). Under 4 U.S.C. 111, the United States consents to state taxation of federal employees provided that the tax does not discriminate because of the source of the pay.

Massachusetts Statute

The applicable Massachusetts income tax statute, G.L. c. 62, §§ 2(a)(2)(E), 3(B)(a)(4), does not violate the intergovernmental tax immunity doctrine as it is interpreted in Davis. Unlike Michigan law, the Massachusetts statute does not discriminate on the basis of the source of the benefits. The determining factor for the Massachusetts exemption is whether the retirement fund is a "contributory fund to which the employee has contributed." The statutory provisions treat the same way retirement funds of the U.S. government and those of the state and political subdivisions of the state. Therefore, the Davis decision does not affect the Massachusetts tax treatment of federal retirement income, including military retirement income. Any federal retirement income is exempt from Massachusetts tax if the system is contributory and the employee actually contributed.

Stephen W. Kidder
Commissioner of Revenue

May 8, 1989

TIR 89-6