Supreme Court invalidates Maryland’s personal income tax structure

Lack of a state tax credit for a ‘county’ tax is held to violate the dormant Commerce Clause.
By Sally P. Schreiber, J.D.

The U.S. Supreme Court held in a 5—4 decision that Maryland's personal income tax regime violates the dormant Commerce Clause because it results in double taxation of income earned in interstate commerce, amounting to an impermissible state tariff, and thus discriminates against interstate commerce.

Facts: Maryland imposes two state personal income taxes on taxpayers living or doing business in the state—one is designated a state income tax, and the other is designated a "county" tax (slip op. at 2). The state gives taxpayers a credit against the "state" income tax for state taxes paid to other states but does not give a credit against the "county" income tax, which can result in double taxation of out-of-state income.

The taxpayers in the case, Brian and Karen Wynne, are Maryland residents. The Wynnes, who owned stock in an S corporation that did business in 39 states, claimed a credit on their joint 2006 Maryland return for state income taxes paid to other states. The Comptroller of Maryland allowed the Wynnes a credit against their Maryland state income tax but not against their county income tax and assessed a tax deficiency against the Wynnes.

The Hearing and Appeals Section of the Maryland Comptroller's office affirmed the assessment, as did the Maryland Tax Court; but a state circuit court reversed that holding, and its decision was upheld by the state appeals court, on the grounds that Maryland's tax regime violates the Commerce Clause (slip op. at 3).

Issues: In an opinion authored by Justice Samuel Alito, the Supreme Court explained that the dormant Commerce Clause prevents states from discriminating against interstate commerce. Thus, a state cannot tax interstate transactions more heavily than intrastate transactions or impose a tax that discriminates against interstate commerce by providing a direct commercial advantage to local businesses or by subjecting interstate commerce to multiple taxation. According to the Court, a tax may be invalid under the dormant Commerce Clause even though a state has the power under the Due Process Clause to impose the tax.

The majority found that "[o]ur existing dormant Commerce Clause cases all but dictate the result reached in this case by Maryland's highest court" (slip op. at 6) because those prior cases invalidated state tax systems that might lead to double taxation of out-of-state income and that discriminated in favor of intrastate over interstate economic activity. The majority also found that the fact that the earlier cases on which it primarily relied involved taxes on gross receipts rather than income taxes did not compel a different conclusion, nor did the fact that the taxes in those cases applied to corporations rather than individuals.

Holding: Having determined that Maryland's personal income tax regime would be invalid if it discriminated against interstate commerce, the majority applied the "internal consistency" test to analyze whether it did. The majority found that it failed the internal consistency test because if every state adopted the same tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce. It also found that Maryland's tax regime, by the state's own admission, operated as a tariff, which is the paradigmatic example of a law that discriminates against interstate commerce. Finally, even though taxpayers with interstate rather than intrastate income pay less tax to Maryland under its tax regime because of the credit allowed against the "state" portion of their taxes, it did not matter, since the total tax burden on interstate commerce is higher under the regime.

By Sally P. Schreiber, J.D., a JofA senior editor.

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