The U.S. Supreme Court’s decision in Maryland Comp. of the Treas. v. Wynne will likely be a narrow victory for the taxpayer, predicted a former clerk to a high court justice at a Nov. 12 panel discussion hosted by Jones Day, the Council On State Taxation (COST) and Bloomberg BNA.
The prediction came hours after the U.S. Supreme Court heard oral arguments in Wynne. The former clerk and tea-leaf reader was Anthony Dick, an associate attorney who focuses on federal litigation issues at Jones Day in Washington, D.C.
Dick clerked for Justice Alito from 2011-2012. He explained that the court is unpredictable, particularly in this case, because it is not divided by political lines. Rather, each Justice’s decision will likely depend on his or her preference for the legal doctrine, i.e., the dormant commerce clause, underlying the issue.
The issue in Wynne was whether the dormant commerce clause prohibits states from taxing all the income of its residents – wherever earned – without providing a full credit for taxes paid on income earned in other states. The dormant commerce clause doctrine as applied to state taxation issues prohibits states from burdening interstate commerce by imposing taxes that discriminate against engaging in out-of-state business.
In particular, the Wynnes say Maryland’s county tax violates the dormant commerce clause, meaning it unduly burdens interstate commerce, because they are not allowed to claim credits against the county tax for out-of-state taxes on income earned by their S corporation in 39 other jurisdictions. Maryland argues that it is the state’s constitutional prerogative to tax its residents’ entire income and grant them credits as it sees fit.
Dick said the court’s Wynne decision will likely be close, and he can only speculate which stance each Justice will take. Below is a list of Dick’s tentative predictions. These views are based on his own observations from oral argument and do not reflect the views of his firm.
• Justice Samuel Alito appeared more likely to decide in favor of the Wynnes. During oral argument, he asked whether Maryland’s Solicitor General could dispute the fact that Maryland’s tax regime acts similarly to a tariff. Alito said, “what you’ve done operates exactly like a tariff because it provides an incentive to earn income in Maryland and not outside of Maryland.”
• Chief Justice John Roberts, although sometimes skeptical of the dormant Commerce Clause, also appeared likely to decide in favor of the Wynnes. Roberts’s questioning centered on the internal consistency test and whether Maryland’s tax regime fails the test. A state tax is in violation of the internal consistency test if double taxation of income would result if other states imposed an identical tax regime. Roberts implied Maryland’s tax regime results in double taxation.
• Justice Ruth Bader Ginsburg could decide in favor of either party, but she appeared to lean in favor of Maryland. She presented Wynne’s counsel with a hypothetical of a Maryland resident whose entire income was earned out-of-state, meaning the resident could take a credit on all taxes paid to other states and owe nothing to Maryland, despite sending children to Maryland schools and using other state-provided resources.
• Justice Anthony Kennedy seemed more inclined to decide in favor of the Wynnes. He gave the Wynne’s counsel a chance to shoot down Ginsburg’s hypothetical, and he has generally taken a robust view of the dormant Commerce Clause.
• Justice Stephen Breyer, often considered a pragmatic or functionalist justice, appears to be another likely vote for the Wynnes. He presented the Maryland Solicitor General with a hypothetical comparing the Wynne’s situation to a hot dog stand operated in Hawaii and owned by a California resident that is taxed on its income fully by both states without a credit allowed in California. His hypothetical implies that such a tax regime operates as a tariff, making it unconstitutional because it discourages earning income across state lines.
• Justices Antonin Scalia and Clarence Thomas will almost undoubtedly decide in favor of Maryland because neither has been shy about disclosing their view that the dormant Commerce Clause has no basis in the constitutional text. Justice Scalia even referred to it as “the imaginary negative Commerce Clause” during oral argument. Although Justice Scalia has previously indicated that he will follow precedent to strike down laws that are indistinguishable from other laws that the court has struck down under the dormant Commerce Clause, it appears unlikely that he will consider the present case indistinguishable.
• Justice Elena Kagan could decide in favor of either the Wynnes or Maryland. She has not been on the court long enough to have a firm grasp of her views on dormant Commerce Clause doctrine.
• Justice Sonia Sotomayor, who is another new Justice whose views on the dormant Commerce Clause are not yet well known, seemed to faintly express favor for the taxpayers. She seemed to agree with Chief Justice Robert’s internal consistency test concerns, but she also brought up New York City’s income tax, which functions similarly to Maryland’s tax regime.”
It could be as late as June before the Supreme Court will hand down its decision. Until then we can all only wonder which way the Justices will decide and whether the dormant commerce clause will prevail after this decision becomes the newest precedent.
By: Sarah Mugmon
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