Comptroller of Treasury of Md. v. Wynne
2015 U.S. LEXIS 3404, 575 US 542, 135 S. Ct. 1787 (2015)
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Rule of Law:
A state personal income tax scheme that taxes residents on all income, including income earned in other states, must provide a full credit for income taxes paid to other states to avoid violating the dormant Commerce Clause by subjecting interstate commerce to discriminatory double taxation.
Facts:
- Maryland's personal income tax consists of two parts: a 'state' income tax and a 'county' income tax.
- Maryland residents who pay income tax to another jurisdiction for income earned in that other jurisdiction are allowed a credit against their 'state' income tax but not against their 'county' income tax.
- Nonresidents who earn income from sources within Maryland must pay the 'state' income tax and a 'special nonresident tax' in lieu of the 'county' tax, but Maryland does not tax their income earned outside Maryland.
- Brian and Karen Wynne, Maryland residents, earned pass-through income in 2006 from a Subchapter S corporation (Maxim Healthcare Services, Inc.) that earned income in several states.
- The Wynnes claimed an income tax credit on their 2006 Maryland income tax return for income taxes paid to other states.
Procedural Posture:
- The Maryland State Comptroller of the Treasury denied the Wynnes' claim for a full income tax credit for taxes paid to other states and assessed a tax deficiency.
- The Hearings and Appeals Section of the Comptroller's Office affirmed the assessment, with slight modification.
- The Maryland Tax Court affirmed the Comptroller's decision.
- The Circuit Court for Howard County reversed, finding that Maryland's tax system violated the Commerce Clause.
- The Court of Appeals of Maryland affirmed the Circuit Court's decision, holding that the tax unconstitutionally discriminated against interstate commerce.
- The Comptroller of the Treasury of Maryland (petitioner) sought certiorari from the Supreme Court of the United States.
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Issue:
Does a state personal income tax scheme that taxes residents on all income, including income earned in other states, but provides only a partial credit for income taxes paid to other states, violate the dormant Commerce Clause of the U.S. Constitution?
Opinions:
Majority - Alito
Yes, Maryland's personal income tax scheme violates the dormant Commerce Clause. The dormant Commerce Clause prohibits states from discriminating against interstate commerce. Maryland's tax system creates an incentive for taxpayers to choose intrastate over interstate economic activity because it subjects income earned out-of-state to double taxation; the 'county' tax portion is not credited, meaning part of the income a Maryland resident earns outside the State may be taxed twice. This is economically equivalent to a state tariff, which is the quintessential evil targeted by the dormant Commerce Clause. The tax scheme fails the 'internal consistency' test, which assumes every state adopts the same tax structure and then assesses if interstate commerce would be disadvantaged. Under Maryland's scheme, if every state adopted it, income earned across state lines would be taxed at a higher rate than purely intrastate income because the resident state would tax it without a full credit, and the source state would also tax it. The Court rejected arguments distinguishing corporate versus individual income or gross receipts versus net income taxes, asserting that the principle against discriminatory multiple taxation applies broadly. The State's jurisdictional power to tax its residents' worldwide income under the Due Process Clause does not exempt it from dormant Commerce Clause scrutiny.
Dissenting - Scalia
No, Maryland's tax scheme does not violate the Constitution because the negative Commerce Clause, as applied here, is a judicial invention without constitutional basis. The Constitution grants Congress the power to regulate commerce but does not contain a negative command prohibiting states from burdening commerce or authorizing judges to strike down state laws they deem too burdensome. The 'internal consistency' rule, like other ad hoc tests, is a judicial creation unrelated to the Constitution's text or tradition. The dormant Commerce Clause doctrine is unstable, frequently contradicting earlier decisions, and requires judges to balance economic and state government needs—a task for legislators. The Maryland income tax does not discriminate on its face against interstate commerce, as residents pay the same amount whether they work in Maryland or elsewhere. Furthermore, this tax is not indistinguishable from a tax previously held unconstitutional; rather, prior cases would validate it. While Maryland's law might have disadvantages like double taxation, it also offers benefits like equal revenue collection from taxpayers with equal incomes and administrative simplicity, and nothing in the Constitution precludes Maryland from making these policy choices.
Dissenting - Thomas
No, Maryland's tax scheme does not violate the Constitution. The negative Commerce Clause doctrine lacks textual basis in the Constitution, makes little sense, and has proven unworkable. The notion that a state income tax must provide credits for taxes paid elsewhere would have surprised those who ratified the Constitution. States imposed income taxes at the time of the Constitution's adoption, and there is no indication that those early schemes provided such credits. It is highly implausible that the ratifiers would have understood the Commerce Clause to conflict with their existing state income tax laws and adopted it without expressing concern. In other areas of constitutional analysis, founding-era practices serve as powerful evidence of original understanding. The burden of proof to foreclose a state's sovereign power of taxation under the Federal Constitution should fall on those challenging the duly enacted laws of a State, particularly concerning taxation. The majority's application of the dormant Commerce Clause is incorrect under the Constitution.
Dissenting - Ginsburg
No, Maryland's tax scheme does not violate the dormant Commerce Clause. A long-standing principle of interstate and international taxation, repeatedly acknowledged by this Court, is that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction, based on the privileges and protection of residence. This Court has consistently upheld such residence-based taxation, even when it results in double taxation, recognizing that the Constitution does not prefer one lawful basis for state taxation over another. Maryland's tax is even-handed, taxing residents’ income at the same rate whether earned in-state or out-of-state, and residents have political means to address such taxes. The majority's reliance on the 'internal consistency' test is unpersuasive, as the Court has not rigidly applied it and has upheld internally inconsistent taxes in the past. Moreover, the test is flawed; Maryland could 'cure' the inconsistency by eliminating its special nonresident tax (which doesn't affect the Wynnes) without actually resolving the double taxation for its residents. Resolving the competing tax policy objectives—ensuring fair contributions from residents versus avoiding double taxation—is a task for state legislatures and Congress, not the judiciary.
Analysis:
This decision significantly reinforces the 'internal consistency' test as a crucial component of dormant Commerce Clause jurisprudence, extending its application to individual income taxes in a manner previously applied predominantly to corporate taxes or gross receipts. It clarifies that a state cannot insulate its tax scheme from dormant Commerce Clause scrutiny by merely asserting its jurisdictional power to tax residents' worldwide income under the Due Process Clause. The ruling mandates that states employing a residence-based income tax must provide a full credit for income taxes paid to other states to avoid discriminating against interstate commerce, thereby potentially impacting state tax policies nationwide and encouraging greater uniformity in state income tax credits.
