Maryland personal income tax regime violates Constitution.

• Author: Beavers, James A.

In a 5-4 decision, the Supreme Court held that Maryland's personal income tax regime violates the dormant Commerce Clause because it results in double taxation of some income earned in interstate commerce, amounting to an impermissible state tariff, and thus discriminates against interstate commerce.

Background

The state of Maryland imposes a personal income tax on its own residents with two parts: a "state" income tax, with graduated rates, and a "county" income tax, with a single rate that varies by the taxpayer's county of residence but is capped at 3.2%. However, both components of the tax are state taxes, and the state's Comptroller of the Treasury collects both components. Maryland residents who earn income in other states and pay income tax on that income to the other states are allowed a credit by Maryland against the "state" tax but not the "county" tax. As a result, part of the income that a Maryland resident earns from sources outside of Maryland may be taxed twice.

Maryland also imposes a personal income tax on nonresidents with two parts: a "state" income tax on all the income that they earn from sources within Maryland and a "special nonresident tax" in lieu of the "county" tax. The "special nonresident tax" is imposed on income earned from sources within Maryland, and its rate is equal to the lowest county income tax rate set by any Maryland county.

Brian and Karen Wynne are residents of Howard County, Md. In 2006, the Wynnes owned stock in Maxim Healthcare Services Inc., an S corporation that earned income in states other than Maryland. Maxim filed state income tax returns in 39 states in 2006. The Wynnes' share of Maxim's earned income, credits, and deductions passed through to them from Maxim, and on their 2006 Maryland tax return they claimed an income tax credit for income taxes paid to other states.

The Comptroller of Maryland assessed a tax deficiency for 2006, claiming that under Maryland law the Wynnes were entitled to a credit against their Maryland "state" income tax but not against their "county" income tax. 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 on the grounds that Maryland's tax system violates the Commerce Clause, and the Maryland Court of Appeals (the state's highest court) affirmed.

The Maryland Court of Appeals evaluated the tax under the four-part test of Complete Auto...