July 16, 2015
[Note: Miller & Chevalier filed an amicus brief in this case on behalf of the National Association of Publicly Traded Partnerships]
As discussed in our previous report here, Comptroller of Maryland v. Wynne presented the Supreme Court with a tricky constitutional issue because it implicated some fundamental principles found in the Court’s precedents, but those principles did not all point in the same direction. In particular, Maryland relied on a state’s unquestioned power to tax the income of its domiciliaries wherever earned, while the taxpayers relied on the Commerce Clause’s limitations on double taxation.
The Court’s 5-4 May 18 decision in favor of the taxpayers produced a superficially unusual lineup. The dissenters included the two Justices generally regarded as the most liberal, Justices Ginsburg and Kagan, and the two most conservative Justices, Thomas and Scalia. In the state tax area, however, this lineup is not so surprising. Although tax cases do not necessarily split along ideological lines, the more liberal Justices often are more likely to side with the tax authorities against wealthy taxpayers. Justices Ginsburg and Kagan showed sympathy for the State’s position at oral argument, and they eventually voted in accordance with that position. Justices Thomas and Scalia, by contrast, have a strong ideological view on Commerce Clause challenges to state taxes, and it was virtually a foregone conclusion from the start that they would vote to uphold Maryland’s taxation scheme. In case anyone had forgotten his views, Justice Scalia (joined by Justice Thomas) wrote a 14-page separate dissent to “point out how wrong our negative Commerce Clause jurisprudence is in the first place.”
The majority opinion, written by Justice Alito, was largely unfazed by Justice Scalia’s attack on negative Commerce Clause jurisprudence. The opinion acknowledged in one sentence that Justices Thomas and Scalia had disputed the validity of interpreting the Commerce Clause to have a negative component, but then observed that the doctrine has “deep roots” and moved on, except for a short discussion at the end of the opinion. (Justice Scalia retorted that “many weeds” also have deep roots.)
The majority focused on trying to provide a relatively simple approach to the case under the Court’s existing precedents and on responding to Justice Ginsburg’s different reading of those precedents expressed in her dissent. The Court majority thus rejected the State’s attempts to distinguish certain precedents on the basis of differences in the type of tax. Specifically, the Court “squarely rejected the argument that the Commerce Clause distinguishes between taxes on net and gross income.” And the Court similarly ruled that there was no basis for treating individuals less favorably than corporations under the Commerce Clause.
Having discarded these possible distinctions, the Court ruled that the validity of Maryland’s taxation scheme should be determined based on the “internal consistency test” previously applied in some corporate tax cases. That approach figured more prominently in the Court’s jurisprudence in the 1980s and early 1990s, but had not been invoked much in recent years. Several Justices, however, posed questions at oral argument concerning the test, and Maryland’s inability to show that its scheme satisfied the test proved fatal. The Wynne decision now highlights the test as a key component of future challenges to state tax schemes that arguably create impermissible double taxation. And by the same token, states devising new approaches to raising funds must focus on whether their taxing schemes are “internally consistent.”
The internal consistency test asks whether interstate commerce would be placed at a disadvantage if every state had the same taxing scheme as the one at issue. The Court describes the test as allowing “courts to isolate the effect of a defendant State’s tax scheme.” The Court explained that, if the tax fails the test, this means that it “inherently discriminate[s] against interstate commerce without regard to the tax policies of other States” and that the discrimination is not caused merely by “the interaction of two different but nondiscriminatory and internally consistent schemes.”
This approach led to an arguably paradoxical result in Wynne that was pointed out by the dissent. Maryland’s taxing scheme failed the internal consistency test because of the combination of two features—failure to credit income taxes paid to other states and Maryland’s own taxation of in-state income earned by non-residents. If every state had that taxing scheme, non-resident income would be taxed by multiple states, which would discriminate against interstate commerce. If Maryland did not tax non-resident income, however, its scheme would no longer fail the internal consistency test. Changing Maryland law in that way would save the constitutionality of the tax, even though it would not have helped the Wynnes in the slightest. As Maryland residents, they would still have been subjected to full taxation by two different states on the same income without a credit. The majority held, however, that this objection was irrelevant to the constitutional analysis. The focus is on the inherent structure of a state’s tax, and the impact on a particular taxpayer is not determinative.
Finally, one other interesting aspect of the Court’s opinion was the prominence it gave to an amicus brief authored by a group of “tax economists” who argued that the Maryland taxation scheme operated economically like a tariff on out-of-state income. That discussion illustrated how the Court focused on the economics of the taxation scheme and how the tax operated in the abstract.
In sum, Wynne will become a key precedent in future Commerce Clause challenges to state taxes, inviting an economic focus and demanding an analysis under the internal consistency test.