[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.
Supreme Court Set to Hear Argument in Wynne on Constitutionality of Failing to Give an Income Tax Credit for Taxes Paid to Other States
[Note: Miller & Chevalier filed an amicus brief in this case in support of the taxpayers on behalf of the National Association of Publicly Traded Partnerships.]
Supreme Court briefing is now complete in Comptroller of the Treasury of Maryland v. Wynne, No. 13-485. The issue presented is whether the U.S. Constitution requires a state to allow residents to take a credit against their state income tax liability for income taxes paid to other states on income earned in those states.
Maryland’s state income tax system taxes its residents at both the state level and the county level. Like other states, Maryland recognizes that its residents might earn income out-of-state that will be taxed by the state in which the income is earned, and it provides a dollar-for-dollar credit against the Maryland state income tax liability for those payments. Since 1975, however, Maryland has not provided a similar credit against the county income tax.
Whether Maryland’s failure to give a credit against the county income tax is constitutional depends on the application of the so-called “negative” or “dormant” Commerce Clause. The Commerce Clause is an affirmative grant of authority to Congress to regulate interstate commerce, but the Supreme Court has long understood it to have a negative aspect as well, which “denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.” Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93, 98 (1994). This principle often comes into play in invalidating state taxes that favor in-state businesses and in assessing the fairness of apportionment formulas used to calculate what portion of a multistate corporation’s income is taxable by a particular state.
The Maryland Supreme Court held that Maryland’s failure to grant a credit against the county tax resulted in impermissible double taxation. The State, however, argues that nothing in the Supreme Court’s Commerce Clause jurisprudence requires a state to give such a credit. To the contrary, Maryland argues, the Court has remarked that states have the power to tax the income of their residents, even if it is earned out-of-state, and that power should not be diminished just because of the decision of another state to tax the same income. The taxpayers, however, note that the statements relied upon by Maryland were made in the context of the Due Process Clause and do not indicate that the Commerce Clause can abide the double taxation inherent in Maryland’s failure to give a credit.
Although all states, even Maryland, currently give a credit against the state income tax, the arguments for not requiring a credit against the county tax are equally applicable to the state. Thus, if Maryland prevails in this case, it could open the door for cash-strapped states to decide to eliminate the credits that they currently provide. (If that were to happen, Congress would have the power under the Commerce Clause to pass legislation requiring states to grant a credit.) Thus, the potential importance of this case goes well beyond the particulars of the Maryland tax system, and the case has generated a slew of amicus briefs on both sides. Linked below are the briefs filed by the parties, by the Solicitor General as amicus in support of Maryland, and by Miller and Chevalier on behalf of the National Association of Publicly Traded Partnerships in support of the taxpayers.
Oral argument is scheduled for November 12.