US Supreme Court Gets Involved In Maryland Income Tax Case

By Editorial 30 May, 2014

In a case that could affect the collection of taxes in other states, the United States Supreme Court (SCOTUS) has issued a writ of certiorari so that it can consider a dispute over how, under the Constitution's Commerce Clause, a state may tax the income that its residents earn in another state.

The case in question, Comptroller of the Treasury of Maryland v. Brian Wynne (No. 13-485), arises out of a provision in the individual income tax code in Maryland that, while allowing a tax credit at state level for the tax paid by its residents on their income received in other states, does not allow a similar credit for the "piggyback" income tax the state collects for its counties to fund local services.

With US states generally allowing residents to take tax credits on income earned in and taxed by other states, the Maryland Court of Appeals found, last year, that Maryland's tax system violates the Commerce Clause by discriminating against interstate commerce, in that its residents are discouraged from earning income outside the state through the remaining taxation at county level.

It has been calculated that Maryland's counties could face annual tax revenue losses of up to USD50m if the Court of Appeal's decision is upheld, while there have been warnings that such a decision could also lead to challenges to similar tax arrangements in other states, and would also be inconsistent with statements made by courts in other states.

The broader legal effects of the case have been considered of sufficient importance to attract a brief to SCOTUS from the US Department of Justice (DOJ), pointing out that SCOTUS has "long recognized that states have plenary authority to tax the entire income, wherever earned, of their own residents, who directly benefit from the services funded by income taxes."

The DOJ added that, "although states often choose to grant tax credits to their residents for income taxes paid in other states, nothing in the Commerce Clause compels states to offer such credits, or otherwise defer to other states in the taxation of its own residents' income."

It is expected that SCOTUS will schedule to consider the case later this year.

Tags: Individuals | Court | Compliance | Tax | Tax Compliance | Commerce | Law | Tax Credits | United States | Individual Income Tax | Services | Expats |


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