On May 18, 2015, the U.S. Supreme Court decided Comptroller of the Treasury of Maryland v. Wynne, No. 13-485, holding that the absence of a credit against the local portion of the state’s personal income tax scheme was an unconstitutional violation of the Commerce Clause. This decision is significant because it reaffirmed that the internal consistency test remains part of the dormant Commerce Clause.
Background of Wynne
Brian and Karen Wynne were Maryland residents who owned stock in a subchapter S corporation. During the 2006 tax year they earned pass-through income from the S corporation in 40 states, including Maryland. They also filed personal income tax returns in those states, and claimed an income tax credit against their Maryland income tax for the total amount of tax that they paid to other states. Maryland’s personal income tax imposed on residents is composed of (1) a “state” income tax and a (2) “county” income tax (despite the different names, the state collects both taxes). If Maryland residents paid income tax to another state for income earned in that state, Maryland allowed its residents a credit against the state tax, but not against the county tax. Thus, some of the income that a Maryland resident earned outside the state could be taxed twice.
The Wynnes challenged the Maryland State Comptroller of Treasury’s denial of a credit against the county portion of their state income tax paid to other states. The Maryland Tax Court upheld the assessment, but the state trial court reversed that assessment on the ground that Maryland’s personal income tax system violated the Commerce Clause. The Court of Appeals of Maryland (the state’s highest court) affirmed that decision.
Significance of the Internal Consistency Test
The U.S. Supreme Court affirmed, holding that Maryland’s taxing scheme violated the internal consistency test that must be satisfied under the dormant Commerce Clause. The reaffirmation of the internal consistency test is very important for corporate taxpayers. Had the Court abandoned the test, there would have been adverse consequences in apportionment and other types of cases.
The Supreme Court originally applied that test in a case involving apportionment of corporate income. See Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983). The Court there said: “The first, and again obvious, component of fairness in an apportionment formula is what might be called internal consistency — that is, the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business' income being taxed.”
The Court has also applied the internal consistency test in other contexts, including (to name just two) a telephone excise tax case and a use tax case. See Goldberg v. Sweet, 488 U.S. 252 (1989) and Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995). In Jefferson Lines, the Court said: “Internal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear.”
The Court in Jefferson Lines also said: “A failure of internal consistency shows as a matter of law that a State is attempting to take more than its fair share of taxes from the interstate transaction.” Practitioners therefore understood that the internal consistency test had to be met “as a matter of law.” However, in Wynne, both the State of Maryland and the United States (as amicus curiae) argued that internal consistency was not always a requirement, and the dissent agreed. Fortunately, the majority reaffirmed the importance of that test.