The US Supreme Court today decided Comptroller of Maryland v. Wynne. The Wynnes, Maryland residents, had out of state income duly reported on both their Maryland tax return and on other state tax returns. They wanted a full credit for the non-Maryland taxes paid on their Maryland tax return.
However, the Comptroller of Maryland denied the full credit. Maryland has a system where counties have add-on taxes to the state’s income tax. Maryland allowed the credit for state tax but not the county tax. The Wynnes appealed the decision. They lost at low levels but won in the Maryland Court of Appeals and the Maryland Supreme Court. The Comptroller of Maryland appealed to the US Supreme Court.
The US Supreme Court today held that the dormant commerce clause discrminates against interstate commerce and is unconstitutional:
Maryland’s income tax scheme discriminates against interstate commerce. The “internal consistency” test, which helps courts identify tax schemes that discriminate against interstate commerce, assumes that every State has the same tax structure. Maryland’s income tax scheme fails the internal consistency test because if everyState adopted Maryland’s tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce. Maryland’s taxscheme is inherently discriminatory and operates as a tariff, which is fatal because tariffs are “[t]he paradigmatic example of a law discriminating against interstate commerce.” Petitioner [Comptroller of Maryland] emphasizes that by offeringresidents who earn income in interstate commerce a credit against the “state” portion of the income tax, Maryland actually receives lesstax revenue from residents who earn income from interstate commerce rather than intrastate commerce, but this argument is a red herring. The critical point is that the total tax burden on interstate commerce is higher. [citations omitted]
The easiest fix for Maryland is to offer a full credit for the county tax. The actual fix, though, is up to the Democratic legislature and the Republican governor to decide. Individuals who have been impacted by the discriminatory system may want to file protective claims for refunds if the statute of limitations for them is nearing expiration.
This case also highlights the difficulties facing a taxpayer without deep pockets. Mr. Wynne is an owner of Maxim Healthcare and likely has the funds to fight the matter. In cases like this, it’s rare to win at low levels. Most state boards of tax appeals will rule for the state as long as the matter could possibly be correct.