On May 18, 2015, the United States Supreme Court in Maryland v. Wynne affirmed a ruling from Maryland's highest court and held that a Maryland tax scheme that credits residents for taxes paid on out-of-state income at the state income level but not at the county level, violated the dormant Commerce Clause.1 The Court's 5-4 decision drew strong dissents from Justices Scalia, Thomas, Ginsburg and Kagan. The majority opinion by Justice Alito concluded that Maryland's tax scheme has the same effect as a state tariff and violates the "internal consistency test," which considers whether taxpayers would pay taxes at the same rate if every state adopted the same tax scheme.
A Maryland couple, Brian and Karen Wynne, brought the case. They owned stock in Maxim Healthcare Services, Inc., a subchapter S corporation. Maryland's personal income tax on state residents consists of a "state" income tax and a "county" income tax. The Wynne's reported Maxim's income and received a credit for state income tax paid to other states for their state income tax. However, in accordance with state law, Maryland would not grant a similar credit for income taxes paid to other states against the Wynne's county income tax. The Court of Appeals of Maryland, the state's highest court, ruled that Maryland's tax system violated the Commerce Clause. The Court of Appeals held because interstate commerce would be taxed at a higher rate than intrastate commerce that the tax law discriminated against interstate commerce.
The Supreme Court affirmed based on the Commerce Clause, which grants Congress the power to "regulate Commerce . . . among the several States." (Art. 1, § 8, CL. 3). The Court held that the Commerce Clause contains a negative command, known as the dormant Commerce Clause, which prohibits States from discriminating against or imposing excessive burdens on interstate commerce even when Congress has failed to legislate on the subject. See Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 189 (1995). The dormant Commerce Clause precludes States from "discriminat[ing] between transactions on the basis of some interstate element." Boston Stock Exchange v. State Tax Comm'n., 429 U.S. 318, 332 (1977). The goal is to prohibit a state from providing a direct commercial advantage to intrastate (local) business.
The majority relied principally on three prior cases involving the taxation of the income of domestic corporations.2 In each case, the Court struck down a state tax scheme that may have caused double taxation of income earned out of the state. The schemes discriminated against interstate economic activity by creating an incentive to engage in intrastate rather than interstate business activity. The Court concluded that Maryland's tax scheme was unconstitutional for similar reasons. The Court's ruling is supported by the judicial doctrine referred to as the "internal consistency test." This test looks to the structure of the tax at issue to determine whether its identical application by every State in the Union would disadvantage interstate commerce compared to intrastate commerce.3 The test has been invoked by the Court in seven cases.4 The Court concluded that Maryland's income tax scheme failed the internal consistency test.
Comparing a hypothetical Maryland resident who earns income in another state to one who earns income only in Maryland, the Court concluded that the "internal consistency test reveals what the undisputed economic analysis shows: Maryland's tax scheme is inherently discriminatory and operates as a tariff."5 A Maryland resident would pay more income tax in Maryland solely because he earns income interstate. This situation fails the internal consistency test. According to the Court, Maryland could remedy the "tariff" and satisfy the internal consistency test by offering a credit against income taxes paid to other states when determining the county tax. Under the Court's rationale, any state that fails to provide a tax credit for taxes paid to another state, which is income subject to tax in the resident's home state, is discriminatory and runs afoul of the dormant Commerce Clause.
In a strongly worded dissent, Justice Scalia attacked the dormant or "negative" Commerce Clause, calling it, "a judicial fraud" - a judge invented rule that lacks logic and constitutional foundation. According to Justice Scalia, the Commerce Clause gave Congress the power to prohibit burdensome taxes and laws; it did not empower the judiciary to set aside state laws it deems too burdensome. Separate dissents were also issued by Justices Thomas and Ginsburg, who was joined by Justice Kagan.
Footnotes
1 575 U.S. __, No. 13-485 (May 18, 2015)
2 See J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938); Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939); Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948)
3 See Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995).
4 See American Trucking Assn's., Inc. v. Michigan Pub. Serv. Comm'n., 545 U.S. 429 (2005); Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175 (1995); Goldberg v. Sweet, 488 U.S. 252 (1989); American Trucking Assn's Inc. v. Scheiner, 483 U.S. 266 (1987); Tyler Pipe Industries v. Washington Dept. of Revenue, 483 U.S. 232 (1987); Armco Inc. v. Hardesty, 467 U.S. 638 (1984); Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983).
5 Slip. Op. at 22.
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