The United States Supreme Court has agreed to hear a case that has major tax implications. The central issue in Maryland State Comptroller v. Wayne is the extent to which states can tax income earned in another state by one of its residents. Maryland collects income tax at the state and county level. Residents are allowed to deduct income taxes paid to other states. However, the deduction doesn’t apply to taxes collected by the county.
Brian and Karen Wynne held a stake in an S corporation which did business in 39 states. S corporations, like Limited Liability Companies and Partnerships, are pass-through entities which means income from the business can be applied to individual tax returns. Prior to deductions the Wynnes reported over $126,000 in Maryland state income tax. They claimed credits of more than $84,000 in taxes paid to other states. The Maryland Comptroller allowed the Wynnes to claim a credit from the state income tax but not the county.
The Wynnes challenged this decision in court claiming they were taxed twice. In making their decision, Maryland’s Court of Appeals found the double taxation of income violated the Commerce Clause, which requires fair apportionment and no discrimination against interstate commerce. The state contends that the Due Process doctrine grants them the authority to tax all the income of their residents. Indeed, there’s a long history of states being allowed to gather taxes from residents no matter where the income was generated.
The big issue in this case is how states collect taxes. Maryland officials estimate a ruling in favor of the Wynnes could cost local governments $45 to $50 million annually. On the flip side, a decision for the state would reinforce double taxation laws that are currently on the books elsewhere in the United States. Also, more and more people are choosing to form pass-through entities like S corporations and LLC’s. In this model, profits are applied to the individual’s tax return. The LLC and possibly even the S corporation doesn’t pay these taxes, which means owners are allowed to keep more of their profits.
Arguments in Maryland State Comptroller v. Wynne are scheduled to begin in the fall. I’ll keep you posted during oral arguments and will give a breakdown of the ruling when it happens. Stay tuned!
