Maryland Personal Income Tax Regime Violates Constitution

By James A. Beavers, J.D., LL.M., CPA, CGMA

State & Local Taxes

In a 5–4 decision, the Supreme Court held that Maryland's personal income tax regime violates the dormant Commerce Clause because it results in double taxation of some income earned in interstate commerce, amounting to an impermissible state tariff, and thus discriminates against interstate commerce.


The state of Maryland imposes a personal income tax on its own residents with two parts: a "state" income tax, with graduated rates, and a "county" income tax, with a single rate that varies by the taxpayer's county of residence but is capped at 3.2%. However, both components of the tax are state taxes, and the state's Comptroller of the Treasury collects both components. Maryland residents who earn income in other states and pay income tax on that income to the other states are allowed a credit by Maryland against the "state" tax but not the "county" tax. As a result, part of the income that a Maryland resident earns from sources outside of Maryland may be taxed twice.

Maryland also imposes a personal income tax on nonresidents with two parts: a "state" income tax on all the income that they earn from sources within Maryland and a "special nonresident tax" in lieu of the "county" tax. The "special nonresident tax" is imposed on income earned from sources within Maryland, and its rate is equal to the lowest county income tax rate set by any Maryland county.

Brian and Karen Wynne are residents of Howard County, Md. In 2006, the Wynnes owned stock in Maxim Healthcare Services Inc., an S corporation that earned income in states other than Maryland. Maxim filed state income tax returns in 39 states in 2006. The Wynnes' share of Maxim's earned income, credits, and deductions passed through to them from Maxim, and on their 2006 Maryland tax return they claimed an income tax credit for income taxes paid to other states.

The Comptroller of Maryland assessed a tax deficiency for 2006, claiming that under Maryland law the Wynnes were entitled to a credit against their Maryland "state" income tax but not against their "county" income tax. The Hearing and Appeals Section of the Maryland Comptroller's office affirmed the assessment, as did the Maryland Tax Court; but a state circuit court reversed that holding on the grounds that Maryland's tax system violates the Commerce Clause, and the Maryland Court of Appeals (the state's highest court) affirmed.

The Maryland Court of Appeals evaluated the tax under the four-part test of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), which asks whether a tax is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state. The court determined that the tax failed both the fair apportionment and nondiscrimination parts of the test.

With respect to fair apportionment, the court first held that the tax failed the "internal consistency" test because if every state adopted Maryland's tax scheme, interstate commerce would be taxed at a higher rate than intrastate commerce. It then held that the tax failed the "external consistency" test because it created a risk of multiple taxation. With respect to nondiscrimination, the court held that the tax discriminated against interstate commerce because it denied residents a credit on income taxes paid to other states and so taxed income earned interstate at a rate higher than income earned intrastate. Therefore Maryland's tax regime was unconstitutional to the extent it denied a credit against the "county" tax for income taxes. Maryland petitioned the Supreme Court, which agreed to hear the case.

The Supreme Court's Decision

The Supreme Court held that Maryland's personal income tax regime violates the dormant Commerce Clause. The Court found that the dormant Commerce Clause prohibits a tax regime that discriminates against interstate commerce and that Maryland's tax regime discriminated against interstate commerce because it resulted in double taxation of some income earned in interstate commerce.

The Court explained that while the Commerce Clause is in its language a positive grant of power to Congress, the Court has consistently held that it also encompasses a negative command, called the dormant Commerce Clause, that prevents certain state taxation even when Congress has not legislated on the subject. While admitting that this interpretation has been disputed, the Court stated that the dormant Commerce Clause works to prevent one of the chief problems that led to the adoption of the Constitution: state tariffs and other laws that burdened interstate commerce. Under the dormant Commerce Clause, states are, among other things, precluded from taxing an interstate transaction more heavily than an intrastate transaction or imposing a tax that discriminates against interstate commerce by providing a direct commercial advantage to local businesses or subjecting interstate commerce to multiple taxation.

The Court stated that "[o]ur existing dormant Commerce Clause cases all but dictate the result reached in this case by Maryland's highest court" (slip op. at 6), and it discussed J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938), Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939), and Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948). In all of those cases, the Court invalidated state tax regimes that might lead to double taxation of out-of-state income and that discriminated in favor of intrastate over interstate economic activity.

In the principal dissenting opinion in the case, the dissenters argued that these three cases did not apply because they involved taxes on gross receipts rather than net income. The Court acknowledged that it had made this distinction in some of its earlier cases based on the idea that a gross receipts tax was an impermissible direct and immediate burden on interstate commerce and a net income tax was only an indirect and incidental burden, but it had "rejected this formal distinction some time ago" (slip op. at 8). The Court explained that the direct-indirect burdens test had been replaced with an approach that looks to the economic impact of the tax and that it had squarely rejected the idea that the Commerce Clause distinguishes between the two types of taxes.

Maryland argued to the Court that the three cases did not apply because they involved corporations rather than individuals. In rejecting this argument, the Court stated that it was hard to see why the dormant Commerce Clause should treat individuals less favorably than corporations and that, in all three cases, the argument failed because the taxes that were invalidated applied to individuals and corporations. Maryland also argued that the tax regime was acceptable because resident individuals can vote, and thus the Maryland residents could vote to change the law. The Court disagreed, observing that in previous decisions it had held that if a tax was discriminatory, it was invalid regardless of whether the person challenging the tax was a resident voter or nonresident of the state and that it previously entertained and sustained dormant Commerce Clause challenges by individual residents of the state that was allegedly discriminating against interstate commerce.

The Court also addressed the principal dissent's claim that the Commerce Clause and, by extension, the dormant Commerce Clause impose no limit on Maryland's ability to tax the income of its residents, no matter where that income is earned and regardless of whether it exposed its residents to possible double taxation. The Court said that this confused what a state could do without violating the Due Process Clause of the Fourteenth Amendment with what it may do without violating the Commerce Clause. In support of its position, the Court pointed to a number of cases, including Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which the Court held that while a state might have the power to tax a particular taxpayer, imposition of a tax might still violate the Commerce Clause.

To determine whether Maryland's tax regime discriminated against interstate commerce, the Court applied the "internal consistency" test. Under this test, to identify whether a tax is discriminatory, a court looks to see if the tax regime in question, if applied identically by all states, would put interstate commerce at a disadvantage as compared to intrastate commerce. The test allows courts to distinguish between (1) tax regimes that inherently discriminate against interstate commerce without regard to the tax policies of other states, which would violate the dormant Commerce Clause, and (2) tax regimes that create disparate incentives to engage in interstate commerce (and sometimes result in double taxation) only as a result of the interaction of two different but nondiscriminatory and internally consistent schemes, which would not violate the dormant Commerce Clause. Applying the test to Maryland's tax regime as a whole, the Court concluded that it is inherently discriminatory and operates as a tariff. The Court noted that it had previously expressed in West Lynn Creamery Inc. v. Healy,512 U.S. 186 (1994), that a tariff was "the paradigmatic example of a law discriminating against interstate commerce" and thus this finding under the internal consistency test was fatal to the tax regime.

Maryland also argued that the tax could not be burdening interstate commerce because, by offering residents with interstate income a credit against the state portion of their Maryland income tax, Maryland actually received less tax revenue from these residents than those without any interstate income. The court called this argument a red herring because what mattered in the analysis is whether the total tax burden on interstate commerce is higher, not that Maryland may receive more or less tax revenue from a particular taxpayer. Under Maryland's tax regime, a resident taxpayer with interstate income will face a higher overall tax burden when the taxes paid to other states on the interstate income is taken into account.


Dormant Commerce Clause jurisprudence goes back a long way—arguably­ to the early 19th century cases of Gibbons v. Odgen, 22 U.S. 1 (1824), and Wilson v. Black Bird Creek Marsh Co., 27 U.S. 245 (1829). However, the doctrine's "deep roots," as the majority opinion in this case called them, do not mean it is universally accepted. Two strong dissents in this case, by Justices Clarence Thomas and Antonin Scalia, took issue with the notion that there is a dormant, or as Justice Scalia terms it, "negative" Commerce Clause. Scalia called it a "judge-invented rule" and said, "The fundamental problem with our negative Commerce Clause cases is that the Constitution does not contain a negative Commerce Clause" (Scalia, J., dissenting, slip op. at 1). Nonetheless, rightly or wrongly, the Supreme Court has repeatedly held that it does exist, and there is no reason to believe that the Court will abandon it any time soon, if ever.

Maryland v. Wynne, No. 13-485 (U.S. 5/18/15)   

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