Wynne’s Effect on State and Local Personal Income Taxes

By Kevin Martin, J.D., LL.M.

Wynne's Effect on State and Local Personal Income Taxes
Photo by jsmith/istock


  • In Wynne, the Supreme Court held that Maryland's individual income tax scheme, which provided a partial credit for taxes paid to another jurisdiction, violated the dormant Commerce Clause by discriminating against interstate commerce.
  • In its opinion, the Court found that while the Due Process Clause allowed states to tax out-of-state income of its residents, the state's tax system could nonetheless be invalid under the stricter requirements of the dormant Commerce Clause.
  • Under Supreme Court dormant Commerce Clause precedent, a tax system must meet an internal consistency test and external consistency test to be valid.
  • The Court found that the Maryland tax system did not meet the internal consistency test because if every state had the same system as Maryland, the tax on interstate commerce would be higher than the tax on intrastate commerce.
  • Although the Court struck down Maryland's tax regime, it did not specify that states must use any particular method in their tax regimes to satisfy dormant Commerce Clause requirements.
  • The Court did not draw any distinctions between state taxes and taxes below the state level, so that state, county, city, and other local taxes are treated the same as state taxes when considering whether a credit is valid.

A recent U.S. Supreme Court decision could fundamentally alter personal income tax rules for taxpayers who file returns in multiple states. On its face, the decision in Maryland v. Wynne1(decided May 18, 2015) directly affects only Maryland taxpayers, but its rationale could extend to taxpayers in other states, including individuals who are denied a tax credit on their resident return for the local income and earnings taxes they paid to out-of-state jurisdictions.

This article explores the facts and arguments of the Wynne case, how this unique decision relates to and departs from case precedent, and—importantly—the intended and possibly unintended consequences of the Wynne decision on the taxing schemes of other states and localities across the country.

The Facts of the Wynne Case

The petitioners, Brian and Karen Wynne, are a married couple residing in Howard County, Md. During 2006, the Wynnes held stock in an S corporation (Maxim Healthcare Services) that filed tax returns in 39 states. As a result of the passthrough income the Wynnes received on Schedules K-1, they owed taxes to several of these states, in addition to the taxes they owed to Maryland as residents.

The Wynnes claimed a credit on their jointly filed Maryland resident return for income taxes they paid to other states. As most states do, Maryland offers a credit against its state income taxes for income taxes its residents pay to other states, to prevent double taxation on interstate income. But in Maryland, the credit operates in a somewhat peculiar fashion.

While Maryland allows a credit against its state income taxes, it also imposes a county income tax, and no credit is allowed against this tax for taxes paid to other states.2 Residents pay the county tax at a rate specified by the county they reside in (not more than 3.2%). Nonresidents with income sourced to Maryland pay a "special nonresident tax" equal to the lowest county tax rate in effect at the time (1.25%). All of the revenue generated from the county tax is collected by the state but transferred directly to that county.

According to these rules, Maryland allowed only a partial credit to the Wynnes. They were allowed a full credit against their Maryland state income tax, but they were denied any credit against their Howard County tax. When Maryland disallowed the credit, the Wynnes were assessed a tax deficiency, which they challenged.

The Wynne Case's Legal Journey and Earlier Challenges to the Maryland law

Maryland courts had already addressed the Maryland credit for income taxes paid in previous state decisions. An earlier version of the statute did not expressly limit the credit to the state portion of the tax liability. As a result, in Stern v. Comptroller,3 the Maryland Court of Appeals allowed a credit for the county tax portion paid. After the Stern decision, the Maryland Legislature amended the statute, expressly limiting the credit to the state income tax portion. The Maryland Court of Appeals upheld this limitation in Comptroller v. Blanton.4

Maryland Tax Court

In the Wynnes' first court challenge to their tax deficiency, the Maryland Tax Court sided with the state, citing the amended language of the statute, as well as Blanton.5 The state tax court asserted that, for the county tax portion of the tax bill, "You don't get the credit, and it's not unconstitutional to do this."6 Presumably, the tax court believed the state was not constitutionally required to grant any credit against the county tax portion.

Maryland Circuit Court for Howard County

The Wynnes appealed to the Maryland Circuit Court for Howard County, which reversed the state tax court's decision, finding that the Maryland statute violated the "dormant" Commerce Clause of the U.S. Constitution.7 The dormant Commerce Clause is a judicial doctrine inferred from the Commerce Clause (found in Article I, §8, cl. 3) that expands on the explicit federal power in the Commerce Clause to regulate commerce among the states. The dormant Commerce Clause prohibits the states themselves from passing any laws that would unfairly restrict or inhibit interstate commerce. The circuit court emphasized that none of the prior Maryland decisions regarding this credit, including Blanton, explicitly addressed the dormant Commerce Clause.

One interesting argument Maryland raised in this court is that because the revenue generated from the county tax is paid only to counties and cities, the revenue cannot be viewed the same as the state portion of the income tax. In its decision, the court said that that distinction is not meaningful because the county taxes were not shown to be directly related to any services that the county or state had rendered to the Wynnes.

It is also worth noting that, in Frey v. Comptroller,8 the Maryland Court of Appeals specified that the "special nonresident tax" paid by nonresidents as an equivalent of the county income tax was actually a state income tax. By extension, this holding would also likely mean that the "county tax" paid by residents is a state income tax. This view of the county tax as a state tax does not appear to have been challenged by the state at any level in the Wynnes' case.

Maryland Court of Appeals

Following the circuit court's holding in the Wynnes' favor, the Maryland Comptroller filed an appeal, and the Maryland Court of Appeals granted ­certiorari. The Court of Appeals affirmed the circuit court's decision and also found that the Maryland law violated the dormant Commerce Clause.9

This decision echoed many of the findings originally made by the circuit court. Here, the Court of Appeals briefly discussed the importance of the distinction between state and county taxes:

The Comptroller advances an alternative argument. Because an individual can only be a resident of one county in the universe, even if every taxing jurisdiction adopted Maryland's tax structure, the individual would only be required to pay a county tax once. This, argues the Comptroller, precludes the possibility of multiple taxation by operation of the county tax. However . . . under dormant Commerce Clause analysis, there are generally only two levels of regulation, state and federal. See Associated Indus. v. Lohman, 511 U.S. 641, 650–51 (1994). The Comptroller's analysis posits a third level, the local level, such that a local tax need only be considered in the light of local taxes in other jurisdictions. But there appears to be no authority in the case law for this position.

In other words, the dormant Commerce Clause does not differentiate between state and local taxes. This language suggests that even if the county tax in this case were truly a local tax collected by the county for which it is paid instead of the state, it would still violate the dormant Commerce Clause because a full credit is not available against that tax.

Two Court of Appeals judges dissented in this case. That dissenting opinion argued that the Wynnes had not shown that the county tax imposed on residents, as opposed to the special nonresident tax, had any effect on interstate commerce. Therefore, unlike in Frey, they argued that the dormant Commerce Clause did not apply.

Precedents Address Multistate Corporate Taxation

In addition to the prior Maryland cases discussing this particular statute, these lower court decisions brought up several earlier Supreme Court cases that dealt with similar situations involving multiple state taxation. However, all of these cases are distinguishable in one way or another, which is a large reason the Wynne decision is unique.

One common theme seen in the Wynne case is the question of whether a meaningful distinction can be made between multistate corporate income taxation and personal income taxation. For corporate income taxes, states often use apportionment to avoid double taxation. Apportionment essentially sources taxable income to different taxing jurisdictions based on the corporate activities in each jurisdiction, as viewed through a variety of factors (often a three-factor formula using sales, property, and payroll in each state). For personal income taxes, states normally remedy double taxation by offering a credit for taxes paid to other jurisdictions. The Supreme Court had never ruled on whether the Commerce Clause issues brought up in the context of corporate income taxation among multiple states apply to individual income taxes as well.

Several earlier cases involving corporate taxpayers also concerned taxes other than net income taxes. For example, in a trio of cases cited favorably by the Wynnes,10 the taxes at issue were taxes on gross receipts. In all of these cases, the Supreme Court found that the state taxes on gross receipts ran afoul of the dormant Commerce Clause.

Due Process Clause vs. Dormant Commerce Clause

In the Supreme Court precedents cited by the Wynnes, another important distinction arises between Due Process Clause "nexus" cases and dormant Commerce Clause "apportionment" cases.

Under the Due Process Clause, according to Oklahoma Tax Comm'n v. Chickasaw Nation,11 a jurisdiction can tax all of its residents' income, even income earned outside the taxing jurisdiction. In addition, for nonresidents, a jurisdiction generally can tax income earned within that jurisdiction.

The dormant Commerce Clause, on the other hand, imposes stricter requirements on the state's ability to tax that income, to ensure that a state's system of taxation does not unduly burden interstate commerce. In the Wynnes' case, both the Howard County Circuit Court and the Maryland Court of Appeals argued that prior Due Process Clause cases are irrelevant to this dormant Commerce Clause inquiry. Later, the Supreme Court also made this distinction in its opinion in the Wynne case by citing language from its previous decision in Quill Corp. v. North Dakota:12 "[W]hile a State may, consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause."13 This statement indicates how the dormant Commerce Clause constrains taxes otherwise permitted under the Due Process Clause. In other words, a state's ability to tax its residents on all income is not plenary.

The Complete Auto Four-Part Test and Container Corp. of America

The main test used to determine constitutionality of state taxation under the dormant Commerce Clause is a four-part test from Complete Auto ­Transit v. Brady.14 That case dealt with the constitutionality of a Mississippi tax on the privilege of doing business in the state. Under this test, a state may tax interstate commerce without offending the dormant Commerce Clause, as long as the tax:

  1. Applies to an activity with a substantial nexus with the taxing state;
  2. Is fairly apportioned;
  3. Is not discriminatory toward interstate or foreign commerce; and
  4. Is fairly related to the services the state provides.

The first prong of this test covers the Due Process Clause, while the remaining factors are more relevant to the dormant Commerce Clause analysis. In the Wynnes' case, the Maryland Court of Appeals stated that the primary issues in the Maryland law arise under the second and third parts of this test.

Beginning with Container Corp. of America v. Franchise Tax Board,15 the Supreme Court started using the "internal consistency" and "external consistency" tests to examine whether particular tax laws fostered fair apportionment consistent with the second part of the Complete Auto test. In Goldberg v. Sweet,16 the Supreme Court ultimately suggested that a tax is not fairly apportioned unless it is internally and externally consistent.

  • Internal consistency: Under this test, a tax will violate the dormant Commerce Clause if its universal application by every taxing jurisdiction would cause a taxpayer engaged in interstate commerce to pay more in taxes than a similarly situated taxpayer working only in state.
  • External consistency: Under this test, a tax will violate the dormant Commerce Clause if it taxes a larger portion of revenues from interstate activity than reasonably reflect the in-state component of the activity.

Since its adoption, the internal consistency doctrine has been used by the Supreme Court to invalidate several state taxing regimes, although one was upheld.17

Wynne in the Supreme Court

Briefs and Oral Arguments

Following the Maryland Court of Appeals decision in the Wynnes' favor, the Maryland Comptroller petitioned for certiorari to the Supreme Court, which was granted. A plethora of briefs were submitted to the Court in this case, including amicus briefs from the U.S. Solicitor General's Office, the International Municipal Lawyers Association (IMLA), a group of tax economists, and the American Legislative Exchange Council (ALEC).

The IMLA brief specifically discussed some of the potential far-reaching state and local income tax consequences that could result from the Maryland Court of Appeals decision, stating, "If the Court of Appeals is correct, the dormant Commerce Clause requires that states and their subdivisions re-write their tax codes and continue to provide essential services to residents who may pay little or nothing for them."

IMLA emphasized that every state would now be required to offer a "full tax credit for all income taxes paid in another state or subdivision." Not only would municipalities be required to grant a credit for taxes paid to other states, it argued, but the reverse would also be true: States would need to grant full credit for income-based taxes paid to counties and municipalities. At a minimum, as Maryland's reply brief stated, "any jurisdiction taxing its residents' entire income will face needless uncertainty about the viability of its tax system and its potential exposure to onerous refund claims."

Many of the briefs in support of the Wynnes did not agree with this assertion. The Wynnes' own brief quoted language from the Maryland Court of Appeals decision, which stated that its holding "does not require Maryland to offer credits for taxes paid to other States. Instead, it requires only that Maryland remedy the double taxation imposed by its partial-credit scheme; Maryland may choose among granting a full credit, dividing the tax base [i.e., apportionment], or some other method."

The tax economists' brief argued that when states do not structure their laws to avoid inherent double taxation, the income tax instead acts as a tariff. The brief asserted that those taxes effectively punish taxpayers for receiving interstate income. Ideally, they said that states should adopt a fully neutral tax system: "For example, states could tax only the income of residents wherever earned, or they could tax only income earned within the state, whether by residents or nonresidents." However, most states choose to mitigate the implicit interstate tax burden associated with taxing both residents (on all income) and nonresidents (on source income) by providing a full credit for income taxes paid to other states. This mitigation method effectively avoids dormant Commerce Clause violations. The Stern court's interpretation of the Maryland statute (before its amendment) was consistent with this view.

The briefs submitted in the Wynne case also discuss the relationship between corporate and personal income taxes, since earlier Supreme Court decisions in J.D. Adams, Gwin, White & Prince, and Greyhound Lines led most states to apportion corporate income.18 During oral arguments, the Maryland solicitor general attempted to differentiate corporate taxation based on domicile from individual taxation based on residency. He claimed, "The residence principle that [Maryland is] relying on as a basis for the broad taxing power and the benefits that one receives as residents is unique to individuals, and it's always been articulated in cases involving individuals, so we're talking about personal income taxes here."

However, the Wynnes' attorney did not consider this distinction to be rational, since corporations (and their employees) receive many of the same benefits from the domiciliary state as residents do as a result of their resident status. Interestingly, the Maryland solicitor general also asserted that states were not constitutionally required to provide any level of credit for taxes paid to other states or their subdivisions.

Opinion of the Supreme Court

The Supreme Court affirmed the Maryland Court of Appeals in a 5–4 decision. The division of the justices was somewhat unusual considering their typical ideologies and alliances: Justice Samuel Alito delivered the opinion of the Court, joined by Justices Stephen Breyer, Anthony Kennedy, Sonia Sotomayor, and Chief Justice John Roberts. Justices Antonin Scalia, Clarence Thomas, Ruth Bader Ginsburg, and Elena Kagan dissented.

Alito's majority opinion applied the Complete Auto analysis. Specifically, he said that the county tax regime was not fairly apportioned because it failed to meet the internal consistency test. He used an example to illustrate this point:

Assume that every State imposed the following taxes, which are similar to Maryland's "county" and "special nonresident" taxes: (1) a 1.25% tax on income that residents earn in State, (2) a 1.25% tax on income that residents earn in other jurisdictions, and (3) a 1.25% tax on income that nonresidents earn in State. Assume further that two taxpayers, April and Bob, both live in State A, but that April earns her income in State A whereas Bob earns his income in State B. In this circumstance, Bob will pay more income tax than April solely because he earns income interstate. Specifically, April will have to pay a 1.25% tax only once, to State A. But Bob will have to pay a 1.25% tax twice: once to State A, where he resides, and once to State B, where he earns the income.19

This fair apportionment analysis is further distinguished from earlier Supreme Court cases that focused on a state's power to tax its residents' income based on nexus under the Due Process Clause. The tax scheme here meets due process requirements, but it nevertheless fails the dormant Commerce Clause requirements because it lacks internal consistency.

Alito cited earlier Supreme Court decisions in J.D. Adams, Gwin, White & Prince, and Greyhound Lines favorably, even though the taxes in these cases were gross receipts taxes imposed on corporations rather than net income taxes imposed on individuals. In support of this view, he quoted language from Complete Auto stating that the Court must consider "not the formal language of the tax statute but rather its practical effect." In other words, a tax that creates the potential threat of multiple state taxation violates the dormant Commerce Clause, regardless of the type of tax.

With regard to the corporation versus individual distinction, Alito said that "it is hard to see why the dormant Commerce Clause should treat individuals less favorably than corporations." He rejected the Maryland solicitor general's argument that states provide unique services to individual residents that they do not provide to domiciliary corporations. He also dismissed as "fanciful" the argument that individual taxpayers can remedy this imbalance solely by exercising their voting rights.

One underlying purpose behind Maryland's partial tax credit scheme, according to the state, was to ensure that residents paid at least some income taxes to the state, even if all of the resident taxpayer's income was sourced to another jurisdiction. Maryland argued that this goal was consistent with the state's sovereign power to tax its own residents, but the Court disagreed. For the purposes of the Commerce Clause analysis, "[t]he critical point is that the total tax burden on interstate commerce is higher, not that Maryland may receive more or less tax revenue from a particular taxpayer." Alito used another example to demonstrate this principle:

Assume that State A imposes a 5% tax on the income that its residents earn in-state but a 10% tax on income they earn in other jurisdictions. Assume also that State A happens to grant a credit against income taxes paid to other States. Such a scheme discriminates against interstate commerce because it taxes income earned interstate at a higher rate than income earned intrastate. This is so despite the fact that, in certain circumstances, a resident of State A who earns income interstate may pay less tax to State A than a neighbor who earns income intrastate. For example, if Bob lives in State A but earns his income in State B, which has a 6% income tax rate, Bob would pay a total tax of 10% on his income, though 6% would go to State B and (because of the credit) only 4% would go to State A. Bob would thus pay less to State A than his neighbor, April, who lives in State A and earns all of her income there, because April would pay a 5% tax to State A. But Bob's tax burden to State A is irrelevant; his total tax burden is what matters.20

In the author's analysis, if one were to apply the last sentence of this example literally, it would create massive, most likely unintended consequences for state income taxation. If the "total tax burden" for a taxpayer receiving interstate income could never exceed the tax burden of an identically situated taxpayer with only intrastate income, then total aggregate state income taxes paid by a particular taxpayer could never exceed the rate imposed by the taxpayer's resident state. This rule would drastically alter even internally consistent taxing regimes.

For example, based on this principle, a taxpayer who resides in Florida (a state with no income tax) but works in Georgia would still have an effective 0% state income tax rate based on his resident state's taxation rules. This result would potentially require Florida to grant a fully refundable credit for the taxes paid by the Florida resident to Georgia, effectively subsidizing Georgia's higher income tax rate. There is no indication in the opinion, other than this sentence, that a credit for taxes paid to other states would also now need to be fully refundable to avoid violating the dormant Commerce Clause. Even states that currently grant a full credit restrict that credit to the amount of taxes otherwise owed to the resident state. This last sentence of Alito's example could more plausibly be read to say, "But Bob's tax burden to State A after application of the nonrefundable credit is irrelevant; his total tax burden to State A before applying the nonrefundable credit is what matters."

The majority opinion pointed out that states have other methods to collect taxes from residents beyond income taxes, such as property taxes. It also mentioned that the unconstitutionality of the Maryland statute can be remedied in ways other than granting a full credit for income taxes paid to other states, citing the tax economists' brief. Alito cautioned, however, that the constitutionality of the statute is based on the version of the statute actually presented before it rather than on a "hypothetical tax scheme that Maryland might adopt."

Dissenting Opinions

Three of the four dissenting justices wrote separate opinions, arguing against the majority's holding for different reasons. None of these opinions referred directly to the potential effects on state and local taxation in states and subdivisions outside of Maryland.

Scalia's and Thomas's negative views of the Court's opinion rested largely on their generally unfavorable view of the dormant Commerce Clause (also called the negative Commerce Clause). As Scalia stated, "[t]he fundamental problem with our negative Commerce Clause cases is that the Constitution does not contain a negative Commerce Clause."21

Scalia also noted that the use of the internal consistency doctrine does not mean that taxpayers will not be subject to double taxation. Different states can still adopt internally consistent schemes that, if applied universally, will not result in double taxation, but that can result in double taxation when they interact with one another. Lastly, the tax scheme adopted by Maryland, in his view, is not facially discriminatory since resident taxpayers will not pay any more taxes to Maryland if they work in the state than they would if they worked outside of the state. Thomas also argued that there is no evidence state income tax regimes adopted shortly after the ratification of the Commerce Clause provided any tax credits to avoid potential double taxation.

Ginsburg expressed concern that the Court's opinion will cause residency-based taxation to "recede" to source-based tax rules in all cases to maintain internal consistency. She argued that this subjugation would run counter to the Due Process Clause-based principle that a state can tax its residents' income wherever the income is received. She pointed out that residents receive disproportionately more benefits from that state compared with nonresidents, and residents can also exercise their voting powers to check abuses of the state's taxing power. Ginsburg also questioned the majority's reliance on the internal consistency test as the deciding factor of dormant Commerce Clause analysis because prior Supreme Court cases involved internally inconsistent laws that were ultimately deemed constitutional.

Does Wynne Require All State and Local Taxing Authorities to Offer Tax Credits?

As the Wynnes' brief mentioned, the Supreme Court's holding does not explicitly require states to provide a full credit to individual tax filers for taxes paid to other states and political subdivisions. Nonetheless, as a practical matter, this method is likely the most administratively feasible. States with taxing regimes generally offer individual resident taxpayers a credit for taxes paid, though the mechanics of the credit can differ from state to state.

States taxing corporations commonly use apportionment to avoid violating the dormant Commerce Clause, but for individual residents, apportionment would create its own special kind of administrative burden. A process similar to apportionment is often done with individual returns for part-year residents (usually individuals who have changed residency during the year). Expanding such a system to include any full-year resident taxpayers with out-of-state income sources would create further complication in an already complex multiple-state tax-filing process.

The Maryland Court of Appeals said that Maryland could find some "other method" to ensure compliance with the dormant Commerce Clause. It is possible that the court imagined some tax scheme similar to the one suggested in the briefs written by ALEC and the Council on State Taxation, which would essentially eliminate residency-based taxation and institute a solely source-based tax regime. This taxation method would meet the internal and external consistency tests, though double taxation would still result in certain cases. In addition, as Ginsburg noted, a source-based tax system would also largely eliminate a state's right to tax based on residency, which the Court had consistently protected in prior Due Process Clause cases.

It is unclear whether source-based taxation would eliminate all references to residency for individual income generated from items such as interest, dividends, and capital gains from investments. In most cases, these types of income are sourced to the individual owner's resident state. It is also worth noting that not all states source income identically, and certain difficult-to-classify income sources, such as unemployment income and income from a patent, may be treated differently from state to state.

By contrast, a tax based solely on residency, identified as a "neutral" tax in the tax economists' brief, would not meet the external consistency test. The Supreme Court mentioned this test only once in its opinion, despite numerous references to the internal consistency test. Because external consistency requires that any state tax only the portion of the income reasonably related to the in-state activity, a tax based on residency without regard to source would potentially tax out-of-state income not reasonably connected to in-state activity. Going even further, most states currently granting a full credit do not comply with a strict reading of this test, because the resident state is taxing out-of-state income before the application of the credit. If external consistency is as essential to meeting Complete Auto'sfair apportionment test as internal consistency, then basically all current state income tax schemes may be unconstitutional.

Lastly, to the extent that this decision requires a full credit for taxes paid to other jurisdictions, it runs counter to a footnote from Chickasaw Nation, which quoted in part from a 1987 paper by the American Law Institute:

Although sovereigns have authority to tax all income of their residents, including income earned outside their borders, they sometimes elect not to do so, and they commonly credit income taxes paid to other sovereigns. But "[i]f foreign income of a domiciliary taxpayer is exempted, this is an independent policy decision and not one compelled by jurisdictional considerations."22

This language, which is consistent with the Maryland solicitor general's claims during his oral argument, suggests that neither a credit for taxes paid nor apportionment were constitutional requirements; instead, they resulted from independent policy decisions made in the resident jurisdiction. Wynne has shifted this policymaking from the legislature to the Court, and under the Court's rationale, states and their taxing subdivisions are constitutionally compelled to cure any potential double-taxation issues arising from their tax policies if they are not internally consistent.

Wynne's Significance for Other Local Taxes

The Wynnes' brief downplayed the potential effect of this holding on tax schemes in other states, claiming that every state other than Maryland already grants a full credit for income taxes paid to other states. Nonetheless, as the U.S. Attorney's oral arguments and the IMLA brief pointed out, even those states now may need to go back and reexamine their credit schemes to ensure they pass constitutional muster, since many do not grant a credit for taxes paid to other local taxing jurisdictions.

Example 1: Taxpayer N resides in State X. N works in City Z, located in State Y. Both states impose income taxes, and City Z also imposes its own income tax. N's resident State X imposes a 7% tax rate on all the income of all residents, wherever it is sourced. It also allows a full credit for income taxes paid to other states, not to exceed the tax otherwise owed to State X. State Y imposes a 3% tax on the income of nonresidents sourced to State Y. City Z imposes taxes on nonresident income sourced to the city at a 1% rate. Under its current tax regime, State X grants N full credit for the taxes she paid to State Y, but not the taxes paid to CityZ.

Since the Court in Wynne does not differentiate between state, county, and city taxes, its reasoning would require State X to grant a credit for the taxes paid to City Z as well. Otherwise, N would pay 8% overall in taxes, while a similarly situated taxpayer working solely within State X would pay at a 7% rate, even though State Y's tax rate does not exceed State X's rate.

The fact that the Supreme Court affirmed the Maryland Court of Appeals decision indicates that it accepted the principle that the dormant Commerce Clause does not distinguish among levels of taxation below the state level. In effect, the dormant Commerce Clause treats all state, county, city, and other income taxes not imposed by the federal government as "state" taxes. The Court mentioned that the Maryland tax is actually a state tax (relying on the language in Frey), but its holding did not suggest that this distinction really matters. The Court itself buoyed this viewpoint by focusing on the "practical effect" of the tax rather than the formalities of the statute itself. In other words, a state cannot get around granting a full credit merely by identifying a tax as a "county" tax or as some other type of local tax. The fact that all the revenue from this tax was actually paid to the county also did not alter the result.

The majority opinion in Wynne also suggested that a county or a city cannot limit its credit only to taxes imposed by other counties or cities. Applying this principle with certainty is difficult in this case since Maryland's statute did not explicitly grant any credit against the county tax for either state income taxes or county taxes paid to other jurisdictions. Nonetheless, the Court's decision imperils county and municipal taxing schemes that do not currently offer a full credit for income taxes paid to other states or their subdivisions.

Example 2: J lives in City Z (which taxes residents at 1%) in State Y (which taxes residents at 3%). J works in State X, which imposes a 7% tax rate on nonresident income sourced to the state. State Y allows a nonrefundable credit for taxes paid to other states, and City Z allows a nonrefundable credit for taxes paid by residents to other municipalities or cities.

Based on the holding in Wynne, City Z would be required to grant a credit for taxes J paid to State X. Not doing so would result in the same type of partial income tax credit scheme invalidated in Wynne. The Court's decision would not distinguish between the taxes of State Y and City Z. Without the credit granted by City Z, the taxpayer would pay an 8% rate (1% combined to State Y and City Z after applying the credit, and 7% to State X). By comparison, a similarly situated taxpayer residing and working entirely in City Z would pay 4% in total taxes.

Note that even if City Z granted a full credit for taxes paid to State X in this case, the credit would not put J in the same position as a taxpayer working only in State Y and City Z; it would merely reduce his or her effective tax rate to 7% (7% to State X and nothing to State Y and City Z after applying the full credit). In other words, he or she would still pay a higher rate as a result of the nonresident state's higher rate. This risk is inherent in a tax system that permits each state to set its own tax rate. It can be remedied by the resident state if the credit for taxes paid is fully refundable, but this cure method is likely impractical for reasons mentioned above with regard to Alito's second example.

The Court's rationale could also affect earnings taxes. Just as the Court disregarded the distinction previously made between gross receipts taxes and net income taxes, it would also likely ­ignore the distinction between net income taxes and earnings taxes. A jurisdiction imposing an earnings tax cannot limit the credit it grants solely to other earnings taxes if full credit is now required. Several cities that impose earnings taxes, such as Philadelphia and Kansas City, Mo., do not allow a credit against those taxes for income taxes paid to other jurisdictions.


Following Wynne,states and subdivisions that impose income taxes will need to review their own statutes to ensure that the statutes do not violate the internal consistency doctrine, which now clearly operates as the defining constitutional benchmark for state and local personal income taxes under the dormant Commerce Clause analysis.

Furthermore, the Court's adherence to substance over form by focusing on the "practical effect" of an income tax endangers other state and local tax regimes to the extent they do not offer a truly "full" credit for taxes paid. As the attorney arguing on behalf of the U.S. Solicitor General's office stated during oral arguments, "[e]ven States that do offer credits of the kind [the Wynnes are] seeking would be affected by a decision in this case because it would . . . create constitutional questions about whether . . . and when a credit is required." To offer a full credit, taxing authorities may need to remove all distinctions between state, county, municipal, and city income taxes.  


1Maryland v. Wynne, No. 13-485 (U.S. 5/18/15).

2Maryland Code Tax-Gen. §§10-103, 10-703 (prior to amendment by Md. L. 2015, ch. 489, §4).

3Stern v. Comptroller, 316 A.2d 240 (Md. 1974).

4Comptroller v. Blanton, 890 A.2d 279 (Md. 2006).

5Wynne v. Comptroller, No. 08-IN-00-0791 (Md. Tax Ct. 12/29/09).

6The Maryland Tax Court's electronic records are limited, so the full text of that court's original decision in the Wynnes' case is not available. However, the Maryland Circuit Court for Howard County's opinion addressed important aspects of the tax court decision. This quote is taken from the circuit court opinion, in reference to the tax court case.

7Wynne v. Comptroller, No. 13-C-10-80987 (Md. Cir. Ct. 6/29/11).

8Frey v. Comptroller, 29 A.3d 475 (Md. 2011).

9Maryland v. Wynne, 64 A.3d 453 (Md. 2013).

10J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307 (1938) (an Indiana tax imposed on gross receipts from sales from sources in other states without apportionment was unconstitutional); Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939) (Washington state business privilege tax imposed on out-of-state sales violates Commerce Clause); Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948) (to the extent the tax does not permit apportionment, a New York tax on receipts from interstate transportation is unconstitutional).

11Oklahoma Tax Comm'n v. Chickasaw Nation, 515 U.S. 450 (1995).

12Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

13Wynne, slip op. at 13, quoting Quill Corp., 504 U.S. at 305.

14Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

15Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983).

16Goldberg v. Sweet, 488 U.S. 252 (1989).

17See, e.g., Armco Inc. v. Hardesty, 467 U.S. 638(1984) (gross receipts tax West Virginia imposed only on out-of-state manufacturers violated the Commerce Clause); Tyler Pipe Indus., Inc. v. Washington State Dep't of Rev., 483 U.S. 232(1987) (citing Armco, the Court held Washington's business and occupation tax violated the Commerce Clause because of the ways in which its multiple activities exemption operated); and Oklahoma Tax Comm'n v. Jefferson Lines, Inc.,514 U.S. 175 (1995) (Oklahoma's tax on bus tickets for travel originating in Oklahoma, but ending outside the state, was constitutional).

18Wynne v. Comptroller, No. 13-C-10-80987 (Md. Cir. Ct. 6/29/11).

19Wynne, slip op. at 21–22.

20Id. at 24–25.

21Wynne, dissenting slip op. at 1.

22Oklahoma Tax Comm'n v. Chickasaw Nation, 515 U.S. at 463, fn. 12, quoting American Law Institute, Federal Income Tax Project, "International Aspects of United States Income Taxation" 6 (1987).



Kevin Martin is a lead tax research analyst with The Tax Institute at H&R Block in Kansas City, Mo.


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