In Comptroller v. Wynne (Docket No. 13-485, May 18, 2015), the U.S. Supreme Court ruled that Maryland’s personal income tax scheme unfairly discriminates against interstate commerce. The effect of the current Maryland law is to double tax part of the taxpayer’s income and thereby create an incentive to opt for intrastate rather than interstate economic activity. Since other states have similar taxing provisions and will need to remedy their double-tax situations, this ruling may have far-reaching effects.


A state may tax the income of its residents regardless of where that income is earned. Likewise, a state may tax a nonresident on income earned within that state. As a result, a taxpayer may end up being “taxed twice” when the income is taxed by both the individual’s state of residence as well as the state where the income was generated. The Commerce Clause (Article 1, Section 8, Clause 3) of the U.S. Constitution sets certain constraints on this possibility, which states recognize by providing a state tax credit for payments of out-of-state taxes.

Maryland, for example, imposes a state income tax on all residents’ income that’s earned within and outside the state. In addition, a county income tax is added onto residents of each county and Baltimore City. Nonresidents also must pay the state income tax on income from sources within Maryland. And if a nonresident isn’t subject to the county tax, he or she must pay a special nonresident tax (SNRT) in lieu of the county tax. Thus, all individual taxpayers pay the state income  tax and either the county tax or the SNRT. These taxes are collected by the Comptroller of Maryland, who distributes the proceeds of the county tax to the relevant county.

Taxpayers are able to take a tax credit against their Maryland state tax for similar taxes they paid to other states. The issue is that Maryland doesn’t permit taxpayers to take a credit against the county tax for income taxes paid in other states. Hence, a double tax is created.


The Court of Appeals of Maryland (64 A.3d 453, January 28, 2013) provides an example to illustrate the issue of the Maryland double tax.

Assume each state imposes a state tax of 4.75% on all the income of its residents, a county tax of 3.2% on all the income of residents, and an SNRT of 1.25% on the income of nonresidents earned within the state. Also assume that each state allows a credit for income taxes paid to other states that operates in a manner similar to Maryland’s credit. In other words, assume that the formula and application of the credit take only the taxpayer’s home “state tax” into account.

Mary lives in Maryland and earns $100,000 entirely from activities in Maryland. She would owe $4,750 in Maryland state income tax (0.0475 5 $100,000) and $3,200 in Maryland county income tax (0.032 5 $100,000). That’s a total Maryland tax of $7,950.

John also lives in Maryland and earns $100,000, but half ($50,000) is earned from activities in Maryland and half ($50,000) comes from activities in Pennsylvania. Because John is a resident of Maryland, all of his income is subject to both the Maryland state tax and the applicable county tax. Before the application of any credit, John owes $4,750 in Maryland state income tax (0.0475 5 $100,000) and $3,200 in Maryland county income tax (0.032 5 $100,000). Thus, he owes a total Maryland tax of $7,950, the same as Mary.

Because half of John’s income was generated in Pennsylvania, however, John also owes $2,375 in Pennsylvania state income tax (0.0475 5 $50,000) and $625 with respect to the Pennsylvania SNRT (0.0125 5 $50,000), for a total Pennsylvania tax of $3,000.

John is able to claim a tax credit of $2,375 (Pennsylvania’s state income tax amount) against his Maryland state income tax, but he can’t claim a tax credit of $625 for the Pennsylvania SNRT. Thus, John’s total state taxes are $8,575, which is the sum of his Maryland taxes ($7,950) plus his Pennsylvania taxes ($3,000) minus the Maryland tax credit for the Pennsylvania state taxes ($2,375).

Therefore, compared to Mary, John owes $625 more in state income taxes. This demonstrates that a taxpayer with income sourced in more than one state will consistently owe more in combined state income taxes than a taxpayer with the same income sourced in just the taxpayer’s home state. This may discourage Maryland residents from engaging in activity to earn income in other states.


In affirming the decision of the Court of Appeals of Maryland, the U.S. Supreme Court held that Maryland’s personal income tax scheme violates the dormant Commerce Clause. Per the Court, the law created an incentive for taxpayers to opt for intrastate rather than interstate economic activity. The majority of justices held that Maryland fails the internal consistency test (assuming that if every state adopted Maryland’s tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce) and by undisputed economic analysis that Maryland’s tax scheme is inherently discriminatory and operates as a tariff, which is two of the four prongs of the dormant Commerce Clause.

In addition, the justices dismissed the argument that Maryland would actually receive less tax revenue from residents who earned income from interstate commerce rather than intrastate commerce if a full tax credit were given, calling the argument a “red herring.” The critical point, as noted by the justices, was that the total tax burden on interstate commerce was higher, not whether Maryland might receive more or less tax revenue from a particular taxpayer. As a result, Maryland’s tax unconstitutionally discriminated against interstate commerce, which made it invalid regardless of how much a particular taxpayer had to pay.

In addressing the assertion that the Commerce Clause imposed no limit on Maryland’s ability to tax the income of its residents, wherever that income was earned, the Supreme Court stated that this argument confused what a state may do under the Due Process Clause with what it may do under the Commerce Clause. Maryland’s jurisdictional power to tax its residents’ out-of-state income didn’t insulate its tax scheme from the Dormant Commerce Clause scrutiny.

Maryland has responded to this decision on its website. As a result of the ruling, taxpayers may file an amended tax return (Form 502X) and a supplemental form within three years from the time a return was filed or two years from the time the tax was paid, whichever is later.


Although some might see this decision as a victory for taxpayers because they won’t have to pay a double tax on income earned outside their state of residency, the victory may be short lived. The granting of the full credit on the taxes paid to the other states will result in a decrease in the state’s treasury. States such as Maryland will therefore need to address this shortfall by either reducing services or increasing tax rates. More importantly, this Supreme Court ruling doesn’t only impact Maryland—it affects a number of other states that have imposed a similar double tax on income earned from outside one’s home state.

© 2015 A.P. Curatola

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