The Supreme Court recently ruled on the case of Comptroller of the Treasury of Maryland v. Wynne. Like many Supreme Court decisions, the verdict is divided 5-4. Frequently, a decision like that means that the conservative members of the court have voted one way, the liberals another, and Justice Kennedy is the deciding swing vote. The case of Wynne, however, the decision has split the justices but not along the expected lines. Justices Alito, Roberts, Kennedy, Breyer and Sotomayor affirmed the decision, while Justices Scalia, Thomas, Ginsburg and Kagan dissented for varying reasons.
The decision may have far reaching tax consequences for states beyond Maryland and it highlights some of the potential complexities involved in American law, tax or otherwise.
The case arises from the particulars of Maryland’s tax structure. Like many states, Maryland imposes a tax on the income of its residents. In addition to this state income tax, Maryland also collects a second income tax from its residents which it calls a county tax. Although called a county tax, the tax is collected by Maryland’s Treasury and is handled by the state. Also like many states, Maryland provides tax credits to its residents for income tax they pay to other states. (This most commonly arises when a Maryland resident earns income in another state.) Maryland only offers these credits, however, on the state portion of the income tax. The county portion is not reduced by such credits.
The Supreme Court held that this tax scheme is unconstitutional because it violates the dormant Commerce Clause. Two lines of dissent emerged among the justices. Justices Scalia and Thomas dissented regarding the dormant Commerce Clause, arguing essentially that the dormant Commerce Clause is a misreading of the actual Constitution. (Each Justice filed his own dissenting opinion and joined with the other’s in part.) Justice Ginsburg dissented on the grounds that states have the right to tax the full income of their residents and that there is no constitutional requirement for states to offer credits and if they do offer them, they do so as matters of tax policy, not because the Constitution requires them to do so.
The Commerce Clause is found in Article I of the United States Constitution and it grants Congress the power “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” The Clause on the surface is straightforward. As you would expect from its name, it gives Congress the power to regulate commerce. It’s also not immediately apparently how this affects Maryland’s tax structure.
The intersection with Wynne has to do not with the words of the Commerce Clause as they appear in the Constitution but instead with what is known as the dormant Commerce Clause. While the Clause itself talks about Congress, the Clause has frequently been used in the courts to regulate the actions of states. This is interpretation is the so called dormant Commerce Clause. In general summary, it holds that states cannot treat transactions differently because of the state in which they arise. This prohibits, among other things, states imposing tariffs on goods coming from other states.
The majority opinion in Wynne held that Maryland’s income tax structure violated the Clause after applying various tests derived from prior cases on similar matters. If every state adopted such a policy, then interstate commerce would in effect be taxed at a higher rate than intrastate commerce, according to the ruling. Prior cases before the Supreme Court have invalidated tax schemes that might lead to double taxation of out-of-state income and favored intra- over interstate commerce. The majority opinion said these prior decisions made this decision a forgone conclusion.
The full extent of the decision remains to be seen. In Maryland it will require the state to change its income tax structure. Other states may have tax schemes that run afoul of the decision.
Horowitz Law Offices represents taxpayers before the IRS, the Illinois Department of Revenue and the Chicago Board of Finance in connection with various tax matters. You are welcome to contact us at (312) 787-553 or firstname.lastname@example.org