Maryland v. Wynne Decided By The US Supreme Court Result Continues to be Confusing

William Delaney, EA
Westwood, MA

In Comptroller of the Treasury of Maryland v. Brian Wynne, the issue boils down to whether or not a Maryland resident, who is subject to tax by another state on a portion of his income, may claim a credit on his resident (MD) return for tax paid to that other state when his resident state also taxes the out-of-state source income.  One would think that the answer is yes, it’s a slam dunk in a manner of speaking, because the Commerce Clause in our federal constitution protects taxpayers from being subject to tax by multiple states on the same income.  However, the State of Maryland thought otherwise, and it was supported in this appeal by the federal government!

The Maryland income tax scheme is unique (which is a cause for confusion in and of itself) in that there is a state income tax and also a county income tax.  “Despite the names that Maryland has assigned to these taxes, both are State taxes, and both are collected by the State’s Comptroller of the Treasury.”  (Opinion of the Court, para. I)
Prior to 1975, the state allowed full credit (subject to limitations) for tax paid on both assessments to residents whose income was also taxed (in whole or in part) by another state.  In 1975 that changed as a result of legislation which effectively set aside any credit for tax assessed via the county tax, leaving only the credit for tax assessed via the income tax portion of the state tax.

Now comes Brian and Karen Wynne, Maryland residents, who pay taxes to other states on much of their out-of-state income from a pass-through entity.  The entire pass-through income is taxed by MD on their resident return.  When calculating the credit for tax paid to another state, the Wynne’s sought to apply a credit to both the state income tax and the county income tax (since both were imposed on their total pass-through income).  MD allowed a credit against the state income tax but disallowed a credit against the county income tax.

Although the Wynne taxpayers lost their appeal, they prevailed both at the Circuit Court for Howard County and at the Court of Appeals of Maryland.  Both Courts reversed the State of Maryland on the ground that Maryland’s tax scheme violated the Commerce Clause.  The Court of Appeals also cited Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) which established a four part test for evaluating such tax situations.  The Court determined that the tax failed two parts of the test, which then rendered Maryland’s tax scheme unconstitutional to the extent that it “…denied the Wynnes a credit against the ‘county’ tax for income taxes they paid to other States.”  (Opinion of the Court para. I, page 4)

The appeal by the State of Maryland, supported by a U. S. Treasury Department amicus brief, argued that there was no justification for a dormant Commerce Clause concept, and that states should be free to tax as they see fit.  Were the Court to accept this premise, it would be unnecessary for any state to allow a credit for tax paid to another state on the same income.  Double taxation would be both allowed and allowable.  Multiple taxation on the same income would also be possible.  A disaster waiting to happen.

Fortunately, the disaster did not occur.  The Court cited Armco Inc. v. Hardesty, 467 U.S. 638, 642 (1984) and quoted:  A State “may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.”  In the Opinion of the Court, Part II, B, the Court found that  “Our existing dormant Commerce Clause cases all but dictate the result reached in this case by Maryland’s highest court.”

According to some comments which your editor has seen, along with opinions expressed by tax preparers, this decision means that all local income taxes such as county and city income taxes, would be subject to a credit for income tax paid to another state on income also taxed by the county or city.

The Courts have ruled that the county tax is actually an additional state tax, a point which was conceded when the county tax statute came into being, since a credit for out-of-state tax was allowed against both the state income and the county income taxes.  In 1975, however, the county tax was decoupled by legislation and the out-of-state based credit was no longer allowed.  Thus, the reason why the Wynne taxpayers protested.

So, are the usual city and/or county based income taxes imposed elsewhere really part of a state income tax scheme which would cause them to be the type of tax to which an out-of-state credit must be applied?  New York City and Yonkers impose income tax on residents and tax all income, both in-state and out-of-state.  The tax is administratively collected through use of the New York State individual income tax return forms.  Your editor’s reading of the decision is that the Court viewed this as a state income tax issue and rejected the concept that the tax, labeled as a county tax, was anything other than a state income tax or a state tariff imposed on inter-state commerce.  Are the usual county and/or city taxes similar?  They are not, in your editor’s opinion.  However, are they imposed on out-of-state income reported by resident taxpayers.  They are, so does that bring them under the same dormant Commerce Clause concept?  In your editor’s opinion, they tax the same interstate commerce, so they probably violate the nondiscrimination part of the Complete Auto Transit, Inc. test.  This would make county and city taxes so imposed also subject to allowing a credit for tax paid to another state.

Stay tuned…  It ain’t over just yet!