Comptroller of the Treasury of Maryland v. Wynne et ux. – Double Taxation Unconstitutional for Refusal to Credit Taxes Paid in Other States

(U. S. Supreme Court, Slip No. 13–485. May 18, 2015)

Brian and Karen Wynne challenged Maryland’s position of “double taxation” in which Maryland refused to credit taxes paid to other states on their county income tax while allowing for the income tax credit against the state income tax for taxes paid to other states. On certiorari, the U.S. Supreme Court ruled such treatment unconstitutional as it essentially amounted to double taxation. Comptroller of the Treasury of Maryland v. Wynne et ux. (U. S. Supreme Court, Slip No. 13–485. May 18, 2015).

State tax systems normally tax resident individuals on 100% of their taxable income. They tax non-residents on only the share of income apportioned or allocated to the state. In order to keep their residents from being gouged by multiple state income taxes, the states typically allow them a “credit for taxes paid in other states.” This is, roughly, the lesser of the tax paid to the other state or the resident state tax computed on the out-of-state income.

Maryland failed to allow a credit for taxes paid in other states for the “county” portion of its individual income tax. The U.S. Supreme court ordered Maryland to issue such a credit to the plaintiffs, who had out-of-state S corporation income.

Maryland’s personal income tax on state residents consists of a “state” income tax, Md. Tax-Gen. Code Ann. §10–105(a), and a “county” income tax, §§10–103, 10–106. Residents who pay income tax to another jurisdiction for income earned in that other jurisdiction are allowed a credit against the “state” tax but not the “county” tax. §10– 703. Nonresidents who earn income from sources within Maryland must pay the “state” income tax, §§10–105(d), 10–210, and nonresidents not subject to the county tax must pay a “special nonresident tax” in lieu of the “county” tax, §10–106.1. Respondents, Maryland residents, earned pass-through income from a Subchapter S corporation that earned income in several States. Respondents claimed an income tax credit on their 2006 Maryland income tax return for taxes paid to other States. The Maryland State Comptroller of the Treasury, petitioner here, allowed respondents a credit against their “state” income tax but not against their “county” income tax and assessed a tax deficiency. That decision was affirmed by the Hearings and Appeals Section of the Comptroller’s Office and by the Maryland Tax Court, but the Circuit Court for Howard County reversed on the ground that Maryland’s tax system violated the Commerce Clause of the Federal Constitution. The Court of Appeals of Maryland affirmed and held that the tax unconstitutionally discriminated against interstate commerce. The Supreme Court ultimately held that Maryland’s personal income tax scheme violates the dormant Commerce Clause.

This landmark ruling will likely impact many other states who still do not allow a credit against local income taxes, as well as a number of local governments that fail to provide a credit for state taxes paid against local taxes.

If you have questions about tax ramifications you can contact the Hood Law Group at 816-561-5000 or send us a message through the form below.

*This post was originally published on July 28, 2015