Supreme Court Hears Md. Case Questioning the Taxing of Out-of-State Income - Southern Maryland Headline News

Supreme Court Hears Md. Case Questioning the Taxing of Out-of-State Income

By Ashley S. Westerman

WASHINGTON (Nov. 12, 2014)—People who earn out-of-state income and pay income taxes in those other states should not be subject to income taxes in their state of residency, argued a lawyer for a Maryland couple before the Supreme Court Wednesday.

Brian and Karen Wynne, of Howard County, are plaintiffs in Comptroller of the Treasury of Maryland v. Brian Wynne. Court documents show the case seeks to answer the question: “Does the United State Constitution prohibit a state from taxing all income of its residents—wherever earned—by mandating a credit for taxes paid on income in other states?”

Maryland has an out-of-state income tax credit that can be used to offset state income taxes. But there is no equivalent credit that can be used to offset county income taxes, so counties can tax the out-of-state income.

Mr. Wynne, who is a co-owner of Maxim Healthcare Services Inc., which operates in several states, argues that is a violation of the dormant Commerce Clause.

University of Maryland Carey School of Law Professor Mark Graber said the dormant Commerce Clause says “there are some state regulations of interstate commerce that are unconstitutional even when Congress does not act.”

“So there is no federal law that prohibits or requires states to give tax credits for taxes paid in other states,” Graber said. “But the claim the Wynnes are making is that, in fact, Maryland’s failure to do so sufficiently burdens interstate commerce.”

During oral arguments, Dominic Perella, counsel for the Wynnes, told justices that the clause “operates to force (the state) to structure their taxes in a way that avoids double taxation.”

However, Maryland argues that states have the authority to tax all income of their residents, no matter where that income is earned. Further, the state says that if it offered a full tax credit against out-of-state income, certain residents could take advantage of state and local benefits without having contributed to them.

Maryland’s acting Solicitor General William Brockman said during oral arguments that “because all residents are treated the same, they are taxed on their entire income regardless of where it is earned.”

The Obama Administration supports the state’s arguments, filing an amicus brief on its behalf. Eric Feigin, assistant to the Department of Justice Solicitor General, told the justices that, in some cases, Marylanders will be taxed more because they conduct more business outside of Maryland than inside.

“But I don’t see why that’s discrimination attributable to Maryland,” Feigin said. “It arises from the combination of the income taxes of two states.”

In their questioning, the justices seemed split on where they thought this case might be heading.

For example, Justice Ruth Bader Ginsburg said that suppose there was a Maryland resident who earned only out-of-state income. She said, according to the Wynne’s argument, that Maryland resident owes nothing to Maryland because he can just apply for a tax credit.

“Leaving the residents without anything,” Ginsburg said. “Without a penny from this resident who may have five children that he sends to school in Maryland.”

On the other hand, both Justice Stephen Breyer and Justice Samuel Alito, said it sounds like Maryland is operating a tariff.

“Because it provides an incentive to earn income in Maryland and not outside of Maryland,” Alito said.

Additionally, Justice Antonin Scalia questioned why the state of residence, in this case Maryland, has to provide a tax credit, rather than the state where all the out-of-state income was made.

“Now, maybe it doesn’t work the same way with respect to the imaginary negative Commerce Clause,” Scalia said. “But as far as fairness is concerned, I don’t see the difference.”

Depending on how the high court rules, this case could have widespread impact.

If the justices side with the Wynnes, advocates of state and local governments say it will cost them. The Maryland Bureau of Revenue Estimates says it could cost local governments up to $190 million plus interest in one-tine protected claims and retroactive refunds.

The Maryland Association of Counties estimates a smaller cost of $120 million to local governments in retroactive refunds, but says it could also reduce local income tax revenues by about $50 million a year.

A decision is expected by June.

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