Supreme Court rules Maryland personal income tax unconstitutional in Wynne.

• Author: Mata, Pilar
• Position: WASHINGTON WATCH

On May 18, the U.S. Supreme Court decided Comptroller v. Wynne, holding that Maryland's personal income tax--which did not offer its residents a full credit for income taxes paid to other states on income they earned in those states--was unconstitutional.

The Courts decision was deeply divided, with a 5-4 majority opinion by Justice Samuel Alito and dissenting opinions by Justices Antonin Scalia, Clarence Thomas, and Ruth Bader Ginsburg. The decision represents a significant victory for taxpayers and reaffirms the Courts dormant Commerce Clause jurisprudence. TEI filed an amicus brief authored by Dan Dejong in support of the taxpayers, under the aegis of the State and Local Tax Committee, whose chair is Greg Potts.

The taxpayers in the case, Brian and Karen Wynne, were residents of Maryland who earned income from a subchapter S corporation that conducted business in many states. The S corporations income passed through to the Wynnes and was subject to tax on their personal income tax returns. Maryland imposed state-level and county-level taxes on its residents' incomes, as well as a special state-level tax in lieu of the county-level tax on nonresidents' incomes earned within the state. Maryland provided its residents with a credit for state taxes paid on income earned outside the state against the state-level tax but not the in-lieu-of-county-level tax. The Wynnes challenged Maryland's tax scheme, claiming that it was unconstitutional.

The majority agreed and held that Maryland's tax scheme violated the dormant Commerce Clause by discriminating against interstate commerce. The Court reaffirmed its prior jurisprudence, holding that the dormant Commerce Clause precludes a state from taxing a transaction more heavily when it crosses state lines than when it occurs entirely within the state.

Applying the internal consistency test, which hypothetically assumes that each state applies the at-issue tax scheme, the Court held that Maryland's tax failed because Maryland residents earning out-of-state income would be taxed more heavily than Maryland residents solely earning in-state income. Specifically, Maryland residents earning out-of-state income would be subject to Maryland's resident state- and county-level taxes, as well as a state-level and in-lieu-of tax on out-of-state income in the state where such income was earned, and they would only receive a...