Yesterday, the United States Supreme Court issued its opinion in Comptroller v. Wynne, a closely watched case that had potential to reshape constitutional limitations on state taxation of interstate commerce. In a 5-4 decision, the Court held that Maryland’s unique personal income tax regime ran afoul of the dormant Commerce Clause of the United States Constitution because it did not allow taxpayers to credit income taxes paid to other jurisdictions against the county component of Maryland’s income tax. While the direct implications of this case may be limited for most taxpayers, the decision is noteworthy for its direct reaffirmation of key constitutional restrictions on taxing multistate taxpayers.
The taxpayers in Wynne were Maryland residents who owned stock in an S corporation that generated income in 39 states. Maryland imposed state and county income tax (Maryland has a bifurcated state and county income tax regime) on the taxpayers’ entire distributive share of income from the corporation—a common practice in states that tax their residents. Like most states that take this approach, Maryland provided the resident taxpayers with a state income tax credit for income taxes paid to other states. Maryland, however, did not allow the taxpayers to claim the credit against the county component of the income tax.
In line with prior dormant Commerce Clause state tax jurisprudence, the Court analyzed Maryland’s income tax regime using the “internal consistency test” to determine if the tax inherently discriminates against interstate commerce. Applying this test, the Court determined that Maryland’s tax scheme discriminates against interstate commerce because a Maryland resident who earns income in another state, and is taxed on that income, would pay more total tax than a resident who earns income only in Maryland. The scheme, which the Court likened to a tariff, creates a strong economic incentive to earn income from in-state sources.
Although Wynne does not appear to create a major shift in constitutional limitations on state taxation, it did reaffirm the validity of the internal consistency test, which has been consistently used by state courts over the last three decades to determine whether a tax violates the Commerce Clause. Some observers doubted whether the internal consistency doctrine was still valid after American Trucking Association v. Michigan Public Service Commission, but Wynne should provide direction to state courts and taxpayers that internal consistency is alive and well. The decision also clarifies that (1) both individuals and corporations are entitled to Commerce Clause protections, (2) taxing jurisdiction under the Due Process Clause does not trump the Commerce Clause, and (3) structural differences between gross receipt taxes and income taxes are not constitutionally significant.