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September 23, 2014

2014-Issue 38—The United States Supreme Court has agreed to review the Maryland Court of Appeals Decision in Maryland State Comptroller v. Wynne. This case could have far-reaching implications for how states are allowed to tax income earned by resident individuals. Additionally, depending upon how the case is decided, many more multistate taxpayers could be affected.


Brian and Karen Wynne are a married couple residing in Howard County, Maryland. During the year at issue, Mr. Wynne owned shares in a Subchapter S Corporation that itself did business and filed income tax returns in 39 states. Accordingly, since the majority of states (including Maryland) follow the federal pass-through treatment of such corporations, Mr. Wynne individually paid state income tax in those jurisdictions, either directly or indirectly (if, for example, the S Corporation paid the taxes on behalf of its shareholders). Maryland taxes 100 percent of income earned by residents, regardless of the source of the income. However, the state allows a credit against the state income tax for taxes paid by residents to other states on income sourced to and taxed in those jurisdictions. In Maryland, various counties also impose an income tax on county residents. In contrast to the state-level tax, there is no credit allowed in Maryland against the county tax for taxes paid to other jurisdictions.

The Wynnes were audited by the State of Maryland, and as part of their appeal of the audit results, the Wynnes claimed that the Commerce Clause of the United States Constitution required Maryland to extend the credit described above to county taxes. The Maryland Tax Court disagreed, and upheld the State’s audit assessments.

On appeal, however, the Circuit Court of Howard County reversed the Tax Court’s ruling, and held that the Commerce Clause required Maryland to extend the credit to local taxes. The State appealed that decision to the Maryland Court of Appeals, which affirmed the Circuit Court’s decision. The State appealed that decision to the U.S. Supreme Court, which has agreed to hear the case.


Generally, states are limited in their abilities to subject taxpayers to tax under the Due Process Clause and the Commerce Clause of the U.S. Constitution. The two Clauses must each be satisfied in order for a state to impose a tax upon a taxpayer. If the protections of one Clause are exceeded, but not the other, the tax may not be imposed.

The Due Process Clause of the U.S. Constitution requires that no state shall “deprive any person of life, liberty, or property, without the due process of law.” Courts have interpreted this language to mean that, in the case of individuals, the state must provide benefits and protections to the individual in exchange for the imposition of tax. It is well settled that, in the case of residents, states provide substantial benefits and protections (e.g., public schools, police and fire protection, etc.). Accordingly, states are generally able to tax all of the income of their residents.

In the instant case, the Wynnes do not dispute that Maryland has the ability to tax 100 percent of their income, no matter where it is earned, under the Due Process Clause.

However, as stated above, no state may tax an individual unless both Clauses are satisfied. The Commerce Clause reserves the right of the U.S. Congress to regulate interstate commerce. Over the years, various courts have interpreted this Clause to mean that no state may enact legislation that results in discrimination against interstate commerce. This interpretation is known as the “dormant” Commerce Clause, in that it implies that state legislative action, even in the absence of Congressional action, can violate the Commerce Clause if it unduly burdens interstate commerce.

The Wynne Case

As stated above, the Wynnes do not dispute the point that Maryland has the authority, under the Due Process Clause, to tax all of their income.

However, they argue that, under the dormant Commerce Clause, Maryland cannot tax income earned outside Maryland without allowing a credit (or another mechanism, such as apportionment) so that the income is not taxed twice. The Wynnes argue that absent such a mechanism, Maryland residents who earn income sourced outside Maryland are at a disadvantage when compared to Maryland residents who earn all of their income within the state: in such a scenario, the resident that earns all of his or her income in Maryland will pay Maryland state and local income tax on all of his or her income. In contrast, the resident earning income outside Maryland will pay tax to the jurisdiction where the income was earned and in Maryland as a resident. While the state-level credit will mitigate the double taxation of such income at the state level, it does not apply at the county level. Thus, such taxpayers will always pay tax at a greater rate than taxpayers earning all of their income within Maryland. Hence, the argument is that the absence of a county-level credit violates the dormant Commerce Clause, because Maryland residents earning interstate income are disadvantaged when compared to similarly situated residents who earn income entirely within Maryland. The Wynnes argue that this taxing structure discourages Maryland residents from earning income outside the state (in interstate commerce) and therefore must not be allowed, as it discriminates against interstate commerce.

The Comptroller of Maryland, however, argues that it is well settled that states may tax all of the income of residents, citing a string of state and federal cases. The state’s argument is that as long as the benefits provided by the state justify taxation, the state may tax the income. Many of the cases cited by the state confirm that state and local jurisdictions, by definition, provide substantial benefits to their residents. Accordingly, they are entitled to tax all of the income. Further, the Comptroller argues that the jurisdictions where the income was earned also have a right to tax the income earned there, as such states presumably provided some level of benefit when the income was earned. The state’s argument is that there is nothing inherently impermissible in more than one state taxing income as long as each jurisdiction taxing the income provided the individual with sufficient benefits and protections. Most states allow residents a credit for income taxes paid to other states, but the Comptroller’s argument is that such mechanisms are enacted as a convenience to residents, but are not actually required by the case law cited.

In response, the Wynnes argue that every case cited by the state revolves around an analysis of the Due Process Clause and not the Commerce Clause. The cases cited by Maryland involve situations in which the benefits and protections provided by the Due Process Clause were examined to determine if a state were allowed to tax the income of individuals. In those cases, the privileges and benefits extended to the individuals were sufficient to allow the states to tax the income earned by the individuals (again, the Wynnes argue, under a Due Process Clause analysis).

Maryland counters with the fact that the multitude of cases cited do not address the Commerce Clause because it is not violated in any of the cases (that is, none of the cited cases analyze whether or not the dormant Commerce Clause is violated by taxing structures similar to Maryland, and that if the Commerce Clause were relevant, it would certainly have been a part of the analysis). The Comptroller argues that silence regarding the Commerce Clause implies its irrelevance as opposed to the argument that it had not been “discovered” before.

Why the Supreme Court?

Many commentators were somewhat surprised that the U.S. Supreme Court agreed to hear the case. Typically, the Court hears relatively few state tax cases, and when it does, it is often to settle conflicting positions within the states. As a result, there is much speculation on what the Court will do.

First, the Court could decide that Maryland is correct — that years of precedent allow states to tax the income of residents no matter where earned, that the dormant Commerce Clause is not implicated in such situations, and that double taxation is therefore an acceptable result of more than one jurisdiction providing sufficient benefits in exchange for taxing the income.

Alternatively, the Court could analyze the dormant Commerce Clause and determine, under the Clause, whether or not taxing schemes that do not fully credit taxpayers for taxes paid out-of-state violate the Clause. If they do, states would be required to provide relief from double taxation (through credits, apportionment or some other mechanism).

Finally, some have speculated whether or not the Court will consider whether the dormant Commerce Clause itself should be revisited. Justices Scalia and Thomas have expressed skepticism as to whether or not the Commerce Clause should be interpreted to ban state legislation if it appears to discriminate against interstate commerce — that, instead, the proper body for regulating interstate commerce is the U.S. Congress, as described in the Clause. Of course, if the dormant Commerce Clause is curtailed or otherwise minimized, the ramifications for all multistate taxpayers could be tremendous.

Alvarez & Marsal Taxand Says:

Depending upon the Supreme Court’s ruling, the implications to taxpayers will vary.

First, if the Court agrees with Maryland that all jurisdictions that provide sufficient benefits and protections to taxpayers are entitled to tax-related income, it would conceivably validate Maryland’s argument that more than one layer of taxation is allowable, and that there is no compulsion for states to allow their residents a credit for taxes paid to other states. Most states currently allow such credits, but if a Supreme Court case expressly holds that they need not, it is possible that some states could reduce or repeal such credits, especially in an era where many states are experiencing fiscal difficulties.

Alternatively, if the Court agrees with the Wynnes that the dormant Commerce Clause prohibits a state tax scheme that is discriminatory to residents earning income outside the state, Maryland (and any other similarly situated states) would have to provide a mechanism to mitigate the inherent double taxation involved. To the extent that such changes would impair state revenue collections, other means of raising such revenues would likely be explored by the states. Also, in such situations, taxpayers could possibly be able to file refund claims to recover taxes paid under taxing structures similar to Maryland’s.

Finally, if the Court were to revisit and limit or minimize the dormant Commerce Clause, the implication for all multistate taxpayers would be enormous. Presumably, the ability of states to tax multistate taxpayers would be greatly expanded in such a situation, as the Due Process Clause requirements described above generally provide a lower threshold for taxation than do those of the dormant Commerce Clause. Such a sweeping revision of the current landscape may be unlikely, but the ultimate outcome will not be known until the decision is rendered.


Brian Pedersen
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

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