## Facts

- The New Hampshire House of Representatives requested an advisory opinion from the New Hampshire Supreme Court Justices under N.H. Const. pt. II, art. 74 regarding a proposed amendment to the business profits tax statute (RSA 77-A).
- Under the existing business profits tax, businesses could deduct “reasonable compensation” paid for services when calculating adjusted gross business profits.
- The proposed amendment would cap the compensation deduction at $100,000 per individual per taxable period, regardless of whether the compensation was reasonable.
- The proposal would aggregate compensation paid to the same individual across multiple businesses to determine whether the $100,000 cap was exceeded.
- As a result, compensation above $100,000 to any individual would become nondeductible, increasing taxable “profits” for some businesses based on pay structure and the recipient’s compensation from other entities.

## Issues

1. Whether a $100,000 per-individual cap (with cross-entity aggregation) on deductible compensation under RSA 77-A would violate the New Hampshire Constitution’s requirement that taxes be proportional and reasonable and operate uniformly in rate within the relevant class.
2. Whether the same scheme would create an arbitrary classification that raises concerns under the U.S. Constitution, including equal protection and due process principles.

## Decision

- The Justices advised that the proposed amendment would violate the New Hampshire Constitution’s proportional-and-reasonable/uniformity requirement.
- The Justices reasoned that the cap would create non-uniform effective tax burdens among similarly situated businesses by disallowing otherwise ordinary compensation expenses based on the identity and aggregate compensation of the payee.
- The Justices indicated the amendment also raised serious federal constitutional concerns (equal protection/due process), though the state constitutional defect was the primary basis for their answer.

## Legal Principles

- New Hampshire’s tax clause requires taxes to be “proportional and reasonable” and to operate with uniformity in rate within the class being taxed; legislative tax classifications must be reasonable and non-arbitrary.
- A nominally uniform tax can violate the uniformity requirement if its base is defined in a way that creates materially different effective burdens on similarly situated taxpayers without a rational relationship to the tax’s purpose.
- In a profits-based tax, disallowing deductions for otherwise reasonable business expenses based on factors unrelated to the payer’s net profitability (including third-party compensation decisions) can produce unconstitutional internal non-uniformity.
- Although economic classifications often receive deferential review under federal rational-basis standards, a scheme may still be vulnerable if it rests on an arbitrary classification unrelated to a legitimate governmental purpose.

## Conclusion

The Justices advised that capping deductible compensation at $100,000 per individual, while aggregating compensation across different employers, would convert the business profits tax into a non-uniform levy that taxes similarly situated businesses differently based on compensation patterns and third-party payments, contrary to New Hampshire’s constitutional requirement that taxation be proportional, reasonable, and uniform.


In re Opinion of the Justices, 557 A.2d 273 (N.H. 1989)