Supreme Court invalidates Maryland’s personal income tax structure

The U.S. Supreme Court held in a 5–4 decision on Monday that the personal income tax system imposed by the state of Maryland, which did not give taxpayers a credit against their county income tax for taxes paid to other states, violates the dormant Commerce Clause (Maryland v. Wynne, No. 13-485 (U.S. 5/18/15)).

Maryland imposes two income taxes on taxpayers living or doing business in the state—one designated a state income tax, and the other designated a “county” tax, but both are state taxes (slip op. at 2). The state gives taxpayers a credit against state income tax for state taxes paid to other states but does not give a credit against county taxes, which can result in double taxation of some 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, both on the grounds that Maryland’s tax system violates the Commerce Clause (slip op. at 3).

In an opinion authored by Justice Samuel Alito, the Supreme Court explained that the so-called dormant Commerce Clause prevents states from discriminating against interstate commerce. Thus, interstate transactions cannot be taxed more heavily than intrastate transactions. Further, a state cannot discriminate against interstate commerce by imposing a tax 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 tax in question applied to individual taxpayers, not corporations.

Having determined that Maryland’s tax scheme 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 Maryland’s scheme 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 system, by Maryland’s own admission, operated as a tariff, which is the exemplar of a law that discriminates against interstate commerce. Finally, the fact that taxpayers with interstate rather than intrastate income pay less tax to Maryland under the income tax scheme due to the credit allowed against the “state” portion of their taxes did not matter, because the total tax burden on interstate commerce is higher under the system.

Justice Antonin Scalia’s dissent (joined in part by Justice Clarence Thomas, who also filed a separate dissent critical of the dormant Commerce Clause jurisprudence) illustrates the continuing controversy over the dormant Commerce Clause. He called it “the negative Commerce Clause” and said it was “a judge-invented rule under which judges may set aside state laws that they think impose too much of a burden upon interstate commerce” (dissenting slip op. at 1).  

Justice Ruth Bader Ginsburg, in another dissenting opinion, in which she was joined by Justice Elena Kagan and by Scalia, in part, argued that the dormant Commerce Clause does not necessarily protect taxpayers against double taxation in different states.   

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.