Refund Claim Opportunity: U.S. Supreme Court Rules that Lack of Income Tax Credit for Other State Taxes was Unconstitutional

The Court noted that states are prohibited from discriminating against interstate commerce, including subjecting interstate commerce to the burden of multiple taxation.

Individuals that live in one state and work in another are accustomed to, and may in fact take for granted, their residence state giving them a credit for taxes paid on income earned in the nonresident state. However, the issue of whether or not a state is required to provide that credit was recently the subject of a U.S. Supreme Court case, Comptroller of the Treasury v. Wynne. [1] On May 18, 2015, taxpayers were able to breathe a sigh of relief, when the Court – in a narrow 5-4 decision – ruled that Maryland’s income tax system violated the Commerce Clause of the U.S. Constitution by denying such a credit.

Maryland residents Brian and Karen Wynne owned an interest in an S-corporation that did business in multiple states. Since the S-corporation is typically treated at the state level as a pass-through entity for income tax purposes, the Wynnes paid income taxes as required to those nonresident states based on their share of the S-corporation income that was sourced to such states. [2]

Maryland’s personal income tax on residents consists of two parts: a “state” tax, which has graduated rates, and a “county” tax with rates that vary by county and capped at 3.2 percent. [3] The Court notes that despite the “county” tax label, the tax is really a state tax – it is set forth in the state code and is collected and administered by the state Comptroller of the Treasury. Like other states, Maryland requires residents to report all income regardless of source, and provides a credit against the “state” tax, but not the “county” tax, for taxes paid on income earned in another state. On their 2006 Maryland income tax return, the Wynnes took a credit against both the “state” and “county” tax. The Comptroller denied the credit against the “county” tax, thus triggering this controversy.

In ruling that the lack of a credit against the “county” tax violated the Commerce Clause, the Court noted that states are prohibited from discriminating against interstate commerce, including subjecting interstate commerce to the burden of multiple taxation. To support its conclusion that the Maryland tax was discriminatory, the Court applied what is known as the internal consistency test. The test assumes that all states have the same system as Maryland, then looks to see if interstate transactions bear a greater tax burden than intrastate transactions. [4] Under this hypothetical, and as a result of the lack of a full credit, a taxpayer that earns income in multiple states will always end up paying more tax than a taxpayer who earns his or her income in only one state.


First, Maryland residents that earned income in multiple states and did not take (or were denied) a credit against the “county” tax should consult their tax advisors about the potential refund claims that may be available.

In addition, this case raises the question as to whether other “local” income taxes that do not provide a credit are constitutional. As mentioned above, the Maryland “county” tax at issue was viewed by the Court as a state tax since it was in the state code and collected and administered by the state. Would it make a difference if the “local” tax were truly “local” (i.e. imposed under a local ordinance and collected and administered by the locality)? Taxpayers and their advisors should examine all resident income taxes being paid and to what extent any credits are allowed.

Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at for more information.

[1] For the complete opinion, click here.

[2] This is not true for all states.

[3] Maryland also imposes personal income tax on nonresidents who earn income from Maryland sources consisting of the “state” tax and a “special nonresident tax” in lieu of the “county” tax. The “special nonresident tax” rate is equal to the lowest “county” tax rate.

[4] Multiple taxation can sometimes occur for a taxpayer that engages in interstate commerce as a result of two states having different rules. If each state’s rules satisfy the internal consistency test, then the resulting multiple taxation will generally not be viewed as discriminatory.

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