United States Supreme Court Rules on Maryland’s Personal Income Tax SchemeNews | July 14, 2015
The United States Supreme Court recently issued its decision in Comptroller of the Treasury of Maryland v. Bryan Wynne 575 U.S.___(2015), holding that Maryland’s failure to offer its residents a full credit against the income taxes paid to other states is unconstitutional. Maryland’s income tax scheme is composed of two parts: a “state” income tax and a so-called “county” income tax. Maryland residents paying income tax on income earned in another state were permitted a credit against the “state” tax but not the “county” tax, allowing for the possibility that part of the income that a Maryland resident earned outside of Maryland would be taxed twice.
In the Wynne case, petitioners owned stock in an S-corporation that operated in at least 40 states. As an S-corporation, income of the company passed through to the shareholders, including the petitioners. Petitioners claimed a state income tax credit for the full amount of income taxes paid to other states on their 2006 Maryland state income tax return. In accordance with Maryland law, the Maryland State Comptroller of the Treasury permitted the petitioners a credit against their Maryland “state” income tax but not against their “county” income tax. The Maryland Tax Court affirmed the assessment, but the Circuit Court for Howard County reversed the decision of the Maryland Tax Court on the ground that Maryland’s tax system violated the Commerce Clause of the United States Constitution, which ruling was also upheld by the Court of Appeals of Maryland.
The United States Supreme Court affirmed the decision of the Court of Appeals of Maryland, upholding a long-held precedent of tax law which dictates that a tax scheme is unconstitutional if it has “the potential to result in the discriminatory double taxation of income earned out of state and create[s] a powerful incentive to engage in intrastate rather than interstate economic activity.” However, in doing so, the Court expanded the reach of this doctrine beyond corporate tax law to apply to a state’s individual income taxation scheme as well. The Court’s decision adds yet another case in a long lineage of decisions that, in the instance of income derived from multiple states, requires an individual state’s taxation scheme to fairly apportion taxation among and between the relevant states.