Individual Income Tax Insights: U.S. Supreme Court Made 2015 a Banner Year in State Tax

Supreme_Court.jpgIn the world of individual income tax and tax incentives, 2015 was full of big developments. It is rare to see state tax cases make it all the way to the U.S. Supreme Court, but the past year saw several cases with tax implications reach the highest court in all the land.

In May, the U.S. Supreme Court issued a decision on Comptroller of Maryland v. Wynne, ruling that Maryland’s personal income tax structure, which didn’t offer a credit for taxes paid to other states at the county level, violated the dormant commerce clause. States will have to look at their own tax schemes in 2016 to see if they also violate the dormant commerce clause, according to the Weekly State Tax Report.  As for Maryland, they are issuing refunds to individuals who paid taxes in other states in light of the Wynne decision.

Wynne indirectly raised another issue: whether a state can tax nonresidents. Beyond income tax, this has been a matter of debate for decades. One of the recurring themes this year involves the 1992 U.S. Supreme Court case, Quill v. North Dakota, which established that a state can only impose sales tax on companies with a physical presence in a state. In March, the court ruled on Direct Marking Association v. Brohl (DMA). In Justice Kennedy’s concurring opinion in DMA, he remarked that it may be time to re-examine Quill. Whether Quill is still relevant has been a hot topic at tax conferences this year according to a blog post by Bloomberg BNA’s Jason Plotkin and the Weekly State Tax Report.

Another issue that the Wynne decision highlighted is just how thorny the tax jungle is for high net worth individuals. Most of those affected by the Wynne decision pay taxes in other states because they own companies that do businesses in many states. Being wealthy also makes estate planning more complicated, as highlighted in a blog post by Bloomberg BNA’s Genie Nguyen. Many companies find themselves having to pay substantial death benefits to their top earners in order to provide them some flexibility with their wealth.

One of the most significant U.S. Supreme Court decisions last year is Obergefell v. Hodges, legalizing same-sex marriage in all 50 states. But the decision also has a significant impact on income tax filing for same-sex married couples. Same-sex married couples can not only file their taxes jointly going forward, but they may be able to get refunds from states that required same-sex married couples to file separately in prior years, according to the Daily Tax Report. And the impact of the legalization of same-sex marriage could also improve state tax revenues as the wedding industry sees a boom, according to a blog post by Bloomberg BNA’s Jessica Watkins.

And this year will see more decisions that have tax implications. On Dec. 7, 2015, the U.S. Supreme Court heard oral arguments in California Franchise Tax Board v. Hyatt. One of the main issues in the case is whether a state agency can be sued in another state’s court, but there are also important tax issues at the heart of the case. The case could make it difficult for states to enforce their tax schemes against taxpayers in other states, according to a blog post by Bloomberg BNA’s Jessica Watkins and Laura Lieberman.

Although the nitty-gritty of tax law contains a lot of difficult concepts, one of the main reasons that tax law can be so challenging is that it is an area of constant change. There are so many jurisdictions to keep track of in state and local tax that 2016 is sure to have just as many major developments.

Continue the discussion on LinkedIn:  What big developments do you anticipate seeing in state tax in 2016?

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