The U.S. Supreme Court today held unconstitutional a Maryland tax law that does not allow individual residents a credit against county income taxes for income taxes paid to other states.
The case is: Comptroller of Treasury of Maryland v. Wynne, 575 U.S. ___ (S. Ct. May 18, 2015)
Read the Supreme Court’s decision [PDF 286 KB] that includes dissenting opinions.
Like many other states, Maryland taxes the income its residents earn both within and outside the state, as well as the income that nonresidents earn from sources within Maryland.
Maryland also offers its residents a credit against state income taxes for taxes paid to other states. However, Maryland does not allow taxes paid to other states that exceed the taxes paid to the State of Maryland to be used to offset income taxes imposed by Maryland counties.
At the outset, the Supreme Court dispelled any notion that the county and state taxes must be considered separately.
Despite the names that Maryland has assigned to these taxes, both are State taxes, and both are collected by the State’s Comptroller of the Treasury.
In rejecting the claim that the Commerce Clause places no constraints on a state’s power to tax the income of its residents wherever earned, the Court distinguished the restrictions of the Due Process Clause and the Commerce Clause.
According to the Court, “[t]he Due Process Clause allows a State to tax ‘all the income of its residents, even income earned outside the taxing jurisdiction.” However, although a state may have authority to tax under the Due Process Clause, “imposition of the tax may nonetheless violate the Commerce Clause.”
The Court stated that the Commerce Clause prohibits a state from taxing “a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.” Further, the Court noted that a state may not impose a tax that subjects interstate commerce to the burden of multiple taxation.
The majority opinion noted that the Court has long held that the dormant Commerce Clause restricts states authority to tax corporations. Accordingly, the Court concluded that income earned by individuals must not be treated less favorably, rejecting all arguments made by Maryland and the U.S. Solicitor to distinguish the application of the Commerce Clause to individuals and corporations. The Court pointed to numerous cases where the court has sustained dormant Commerce Clause challenges by resident individuals.
After concluding that the dormant Commerce Clause applied, the Court determined that Maryland’s income tax scheme failed the internal consistency test because if every state adopted Maryland’s tax structure, interstate commerce would be disadvantaged as compared with commerce intrastate.
The Court also rejected attempts to distinguish the facts in this case, which related to a net income tax, from other cases that dealt with gross receipts taxes. “We see no reason why the distinction between gross receipts and net income should matter…,” explaining that previous cases that had distinguished the two were based on a formalistic approach to judicial interpretation that has since been rejected by the Court. Noting that Maryland admitted that its law has the same economic effect as a state tariff—“the quintessential evil targeted by the dormant Commerce Clause”—the Court affirmed the decision of Maryland’s highest court and held that this feature of the state’s tax scheme violates the Constitution.
Justice Ginsburg wrote the primary dissent, joined by Justices Scalia and Kagan. Justice Ginsburg’s dissent was based primarily on the argument that a state may tax all the income of its residents, citing Oklahoma Tax Comm’n v. Chickasaw Nation. She argued that the Constitution does not require a state to provide a credit to residents who earn income that is also taxed by another state, although many states have done so as a matter of “tax ‘policy.’”
Justices Scalia and Thomas wrote separate dissenting opinions to point out their opposition to the dormant Commerce Clause.
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