Supreme Court’s Ruling on Maryland Income Tax System Could Impact Other States

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Jun 10th 2015
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It’s likely only a matter of time until other states encounter legal challenges to their income tax systems akin to what Maryland faced, which the US Supreme Court ruled in May is unconstitutional.

In Comptroller of the Treasury of Maryland v. Wynne, Brian and Karen Wynne sued Maryland after the state said they owed county income tax on income earned by their Subchapter S corporation in several states.

The couple had claimed an income tax credit on their 2006 tax return for taxes paid to other states. But the Maryland State Comptroller of the Treasury allowed that credit only against their state income tax, not the county income tax.

In a 5-4 vote, the Supreme Court justices held that Maryland’s personal income tax scheme violates the Constitution’s commerce clause because it discourages interstate commerce.

In delivering his opinion for the court, Justice Samuel Alito wrote: “But unlike most other states, Maryland does not offer its residents a full credit against the income taxes that they pay to other states. The effect of this scheme is that some of the income earned by Maryland residents outside the state is taxed twice. Maryland’s scheme creates an incentive for taxpayers to opt for intrastate rather than interstate economic activity … . We have long held that states cannot subject corporate income to tax schemes similar to Maryland’s, and we see no reason why income earned by individuals should be treated less favorably. Maryland admits that its law has the same economic effect as a state tariff, the quintessential evil targeted by the dormant commerce clause.”

Justice Alito also noted that, despite Maryland’s description of the two-part tax as a state and county tax, both are state taxes and both are collected by Maryland’s Treasury comptroller.

What other states may be affected by the decision isn’t clear.

The Washington Postreported shortly after the decision that “the ruling is also likely to affect thousands of other cities, counties, and states with similar tax laws,” including New York, Indiana, and Pennsylvania.

In Boca Raton, Florida, tax attorney Marvin Kirsner, administrative shareholder at law firm Greenberg Traurig LLP, emailed this comment to AccountingWEB: “The court said in broad terms that the distinction between a gross receipts tax and an income tax should not matter, because it is the practical effect of the tax that must be considered, not the formal language of the tax statute. There are some states that do not allow an individual to take a tax credit for gross receipts taxes paid to another state. I believe that this language in the opinion might allow the argument that state rules not allowing a credit for gross receipts taxes could be subject to challenge as a violation of the dormant commerce clause.”

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