In a 5-4 decision, the U.S. Supreme Court recently ruled in favor of taxpayers in Comptroller v. Wynne. Mr. and Mrs. Wynne, both Maryland residents, were shareholders in an S corporation that conducted business in close to 40 states. In filing their 2006 Maryland income tax return, the Wynnes claimed a credit for taxes paid to other states. Like most states, Maryland taxes its residents on all income, wherever earned. The state’s individual income tax is comprised of a state tax and a local county tax. Maryland allows the credit for taxes paid to other states to offset the state tax but not the county tax. The Maryland tax court upheld the comptroller’s decision but a Maryland circuit court reversed the comptroller and Maryland’s highest court upheld the reversal. Maryland appealed the case to the U.S. Supreme Court.
The Supreme Court ruled that Maryland’s tax law violated the dormant commerce clause. The court applied the internal consistency test to Maryland’s tax regime and asked if every state adopted Maryland’s tax regime, would interstate commerce be disadvantaged relative to purely intrastate commerce. Because Maryland imposes a county level tax on residents and non-residents, but doesn’t allow a credit for state taxes paid to offset the county tax, residents that earn income out of state will pay more tax than residents earning income only in their state of residence. Accordingly, interstate commerce would be burdened relative to intrastate commerce.
The Wynne case could potentially have wide ranging consequences. Will other states that restrict the use of credits for state taxes paid amend their statutes? Additionally, how will localities that do not allow a credit for state taxes paid to offset local income tax respond?
The state of Maryland will also have its hands full. Prior to the court’s decision, at least 8,000 Maryland taxpayers filed protective refund claims, which the comptroller’s office will now have to review. Additionally, although the court found Maryland’s tax regime unconstitutional, it did not specify a remedy. The Maryland legislature recently passed H.B. 72, which would allow the credit for state taxes paid to offset county income tax for taxable years beginning after December 31, 2014 once the Maryland attorney general advises that the Wynne decision invalidates Maryland’s current tax scheme.