It is not every term that the United States Supreme Court agrees to hear a tax case. Yet today the Supreme Court issued a 5 – 4 decision in favor of a taxpayer.
How did the issue get to the court? States generally provide their residents with a credit on income earned and taxed in another state. Maryland, however, had a county tax scheme that imposed a tax on all income regardless of where the taxpayer earned the income.
The taxpayer, Brian Wynne, was a partial owner in a healthcare services business that operated in several states. He paid Maryland state and county income taxes as well as taxes in other states where the business earned income. Maryland gave him a credit for the out-of-state taxes, but the county did not. He argued to the tax court that he was a victim of double taxation because he had to pay taxes in both the state where he lived and the state he earned the income.
Income taxed twice
Justice Samuel Alito writing for the majority held that the tax was unconstitutional, because it interfered with interstate commerce. He wrote that the tax “creates an incentive” for Maryland taxpayers to do business within the state and avoid activity that crossed state lines.
The state of Maryland had argued that a resident received certain services at a discount if he or she didn’t have to pay as much as a neighbor. Justices Ruth Bade Ginsburg, Antonin Scalia, Clarence Thomas and Elena Kagan dissented. Ginsburg stated that the case came down to policy choices that the states should decide.
The taxpayer can prevail
While this case will not likely have a direct effect in California, it does show how the government can overstep. Rarely are complicated tax cases clear-cut. It often takes the guidance of an experienced attorney to identify and address such issues.
Source: USA Today, “Supreme Court: Two states can’t tax the same income,” Richard Wolf, May 18, 2015.