Last week, the U.S. Supreme Court issued a 5-4 decision in Comptroller of Maryland v. Wynne. The decision confirms that, due to the dormant commerce clause, a state’s income tax laws cannot unfairly discriminate against interstate commerce. Though the court had previously ruled on the issue with regard to corporate taxes, Wynne considered the question for personal income taxes. The practical effect of the decision is that Maryland, which offered a credit for taxes paid to another state at the state level, but not at the county level, now has to change their tax scheme to comply with the decision.
Maryland may have to return about $200 million to taxpayers, according to The Washington Post. The decision, however, will likely have repercussions beyond Maryland. Although nearly all states already give a credit for taxes paid to other states, some jurisdictions may soon have to alter their tax schemes, as explained in a May 22 story in Bloomberg BNA’s Daily Tax Report.
McDermott Will & Emery’s Inside SALT blog brings New York into focus. In 1998, The New York Court of Appeals ruled on In the Matter of John Tamagni v. New York Tax Appeals Tribunal. The opinion held that the taxpayer, who was a resident of New Jersey but established a statutory residency in New York, was not entitled to relief for paying income taxes to both New Jersey and New York. The court ruled that the dormant commerce clause did not apply to matters involving personal income taxes. According to the blog, the Wynne decision calls this holding into question.
The amici curiae brief filed by the International Municipal Lawyers Association (IMLA) highlighted other jurisdictions that may be affected by the Wynne decision. Wisconsin offers a credit for taxes paid for other states, but specifically disallows that credit if income tax is paid to “a county, city, village, town or foreign country.”
The situation in Wisconsin does not follow the same pattern as Wynne, but could be affected by the same analysis. Whereas the Maryland tax discriminated against Maryland residents who paid income tax in other states, the Wisconsin tax scheme affects Wisconsin residents who are subject to a local tax in another state.
The IMLA brief also highlights a 2011 Tennessee Court of Appeals case, Boone v. Chumley. In Boone, the taxpayers, residents of Tennessee, owned stock in South Carolina pass-through corporations. The taxpayers claimed they owed no income tax in Tennessee since they paid income tax to South Carolina and South Carolina’s income tax rate is higher than Tennessee’s. However, Tennessee only allows a credit for taxes paid for shareholders in S corporations if a tax reciprocity agreement exists between Tennessee and the other state, which is not the case with South Carolina.
Interestingly, the issue of the dormant commerce clause arose in Boone. However, based on the opinion, it seems the taxpayers never argued that the dormant commerce clause should apply to personal income taxes. The taxpayers’ argument arose from the fact that payments they received from an S corporation had no nexus with Tennessee. The taxpayers did not dispute their Tennessee residency, but argued that their pass-through income was not their personal income, but income attributable to the S corporation. The court summarily dismissed this argument, holding that “the distinction is based on semantics that are not sustainable.”
In the wake of Wynne, states may start to change their laws to ensure that their tax schemes are not discriminatory. But, perhaps more importantly, Wynne gives taxpayers seeking to challenge discriminatory individual income tax laws in courts a precedent to look towards.
Continue the discussion on LinkedIn: How will your state respond to the Wynne decision?
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