For a significant period of time, since 1873 in fact, the Supreme Court has held that the taxing power of the states is limited by the dormant commerce clause. State taxes on interstate activity must be “fairly apportioned,” meaning that if more than one state may legitimately tax the same income, each state may only tax its fair share. This flows from the Commerce Clause’s negative converse, i.e. its restriction prohibiting states from enacting legislation that overly burdens or discriminates against interstate commerce. In many cases dealing with the taxation of multi-state businesses, courts have enforced the requirement that state taxes be fairly apportioned.
Recently, in the late summer of 2015, the Supreme Court affirmed the ruling of the Maryland Court of Appeals, which found that the state’s failure to provide a county credit for out-of-state income taxes violates the Commerce Clause of the U.S. Constitution. Perhaps more importantly, by affirming this ruling, the Supreme Court for the first time held that a state’s tax on personal income was subject to the restrictions of the dormant commerce clause.
The issue in Wynne involved whether a Maryland law that offsets state income taxes on residents’ out-of-state income, but doesn’t similarly offset county income taxes, was constitutional. At stake was the possibility that the Wynnes may be subject to double taxation.
The dispute in Wynne arose when Brian and Karen Wynne, having earned income in thirty-nine states, attempted to take a credit against their local Maryland county tax for income taxes they had paid to other states. Maryland’s personal income tax scheme created a category for Maryland residents with out-of-state income. While the taxpayers in this category paid state and county tax on all of their out-of-state income, the State of Maryland only extended a credit for the state income taxes paid. Because there was no credit given for the county taxes, the Wynnes were subject to double taxation.
The commerce clause directs that state taxation must fairly reflect the location where income is earned, and that not only do these principles apply to the state, they also apply to the political subdivisions of the state, like counties and cities. Long-established legal principles dictate that taxpayers subject to a multiple tax burden must be provided some credit by the state.
If you have any questions or concerns regarding whether you or your business may be subject to a particular tax, levy or tariff, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
