Comptroller of the Treasury of Maryland v. Wynne et ux. (May 18, 2015 – 575 US ____ (2015)), Alito J. (author), Roberts C.J., Kennedy, Breyer, Sotomayor JJ.; Dissents: Scalia, J., filed a dissenting opinion, in which Thomas, J., joined as to Parts I and II. Thomas, J., filed a dissenting opinion, in which Scalia, J., joined except as to the first paragraph. Ginsburg, J., filed a dissenting opinion in which Scalia and Kagan, JJ., joined).
Précis: Mr. and Mrs. Wynne were residents of Maryland. They had sources of income in a number of states and sought tax credits in Maryland for income taxes paid to those other states. They were granted tax credits against Maryland “state” taxes but not Maryland “county” taxes (“county” taxes being in fact imposed and collected by the State of Maryland). They were unsuccessful in an appeal to Maryland’s Tax Court but succeeded in appeals before the Maryland Circuit Court for Howard County and the Court of Appeals of Maryland on the basis that a denial of the tax credits violated the Commerce Clause.
Maryland was granted certiorari to the United States Supreme Court.
A narrow majority of the Supreme Court dismissed Maryland’s appeal. Alito J., with whom Chief Justice Roberts and Justices Kennedy, Breyer and Sotomayor (an uncommon mix of allies) concurred, held that the scheme of denying tax credits for “county” taxes unconstitutionally discriminated against interstate commerce under the “dormant Commerce Clause”. The decision held that the case was all but determined by prior jurisprudence of the Supreme Court that held that tax schemes which resulted in a double taxation of out-of-state income and discriminated in favour of intrastate economic activity at the expense of interstate commerce were invalid. There was no distinction to be drawn between gross receipts and net income taxes, not between corporate and individual income taxes. While Maryland may have the power to impose such taxes under the Due Process clause imposition of the tax may still violate the Commerce Clause. Applying the “internal consistency” test Maryland’s tax is inherently discriminatory and operates as a tariff which proved fatal since tariffs are the classic example of laws that discriminate against interstate commerce. It was not relevant that Maryland actually received less tax from interstate commerce than from intrastate commerce; the critical point was that the impugned regime increased the overall burden of taxation on interstate commerce.
The dissenters were an equally unusual group. Ginsburg J., with whom Scalia and Kagan JJ. concurred, was of the view that balancing fair tax policy within the State and concerns about double taxation was something best left to state legislatures and the Congress. Scalia and Thomas JJ. were both critical of the application of the dormant Commerce Clause. Thomas J. would have held that the dormant, or negative, Commerce Clause could not be used to strike down a State statute. Scalia J. would have maintained the rule but only for the purpose of
stare decisis.
Discussion by guest contributor Michael Lubetsky of Davies Ward Phillips & Vineberg LLP: This will serve as an overview of the
Wynne decision, which invalided Maryland's "county income tax" as contrary to the dormant Commerce Clause of the US Constitution due to its failure to provide a credit for out-of-state taxes paid.
There was a single majority judgement written by Alito, who apparently didn't consider the case particularly difficult, noting that "Our existing dormant Commerce Clause cases all but dictate the result reached in this case by Maryland’s highest court."
In contrast, the four dissenters wrote three different opinions. The "principal dissent" was authored by Ginsburg and joined by Kagan and (as a secondary ground of dissent) Scalia. Scalia and Thomas each wrote separate dissents, which largely complemented each other.
The majority basically applied the Court's prior jurisprudence on state taxes that distort interstate commerce (which largely involved gross receipts and/or corporate taxes) to personal income tax on residents. Per the majority, the relevant test to assess the constitutionally, under the interstate commerce clause, of state income taxes is the "internal consistency test", explained as follows:
This test, which helps courts identify tax schemes that discriminate against interstate commerce, “looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.” ... By hypothetically assuming that every State has the same tax structure, the internal consistency test allows courts to isolate the effect of a defendant State’s tax scheme. This is a virtue of the test because it allows courts to distinguish between (1) tax schemes that inherently discriminate against interstate commerce without regard to the tax policies of other States, and (2) tax schemes 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. ... The first category of taxes is typically unconstitutional; the second is not. ... Tax schemes that fail the internal consistency test will fall into the first category, not the second: “[A]ny cross-border tax disadvantage that remains after application of the [test] cannot be due to tax disparities” but is instead attributable to the taxing State’s discriminatory policies alone. (references omitted)
The application of this test doomed Maryland's tax:
Maryland’s income tax scheme fails the internal consistency test. A simple example illustrates the 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 re sides, and once to State B, where he earns the income .... the internal consistency test reveals what the undisputed economic analysis shows: Maryland’s tax scheme is inherently discriminatory and operates as a tariff. (reference omitted)
The "internal consistency test" applies to a state's entire regime, not just one aspect of it. This point was called out at footnote 8 of the majority decision. An important consequence of this principle, which the majority seems to accept and the principal dissent criticises, is that Maryland could potentially save its regime by taxing its residents on all their worldwide income (including amounts earned and taxed in other states) and not tax non-residents at all, including on their Maryland-source income. One is left to speculate, however, if and how such a tax scheme could be reconciled with other SCOTUS jurisprudence that has held that corporate income tax must be “fairly apportioned” among the states.
The "principal dissent" was authored by Ginsburg and co-signed by Kagan and Scalia (although Scalia's main reasons for dissent are set out in his separate opinion). The principal dissent largely tracked issues that were raised in oral argument, including whether state-resident taxes should have to "recede" to state-source taxes ("More is given to the residents of a State than to those who reside elsewhere, therefore more may be demanded of them."), as well as the ability of state residents to deal with discriminatory taxation through the ballot box. The principal dissent also (purported) to rely heavily on past jurisprudence that have upheld the right of states to tax their residents on world-wide income (much of the majority decision is spent distinguishing the jurisprudence invoked by the minority). Both the majority and the principal dissent paid great homage to "precedent", although they sharply disagreed on what the "precedent" stood for.
The principal dissent did not really engage the "tariff" analysis of the majority other than to say that the "internal consistency test" can still result in double taxation (such as if one state taxes only residents on 100% of worldwide income and another state taxes only income earned in the state). The dissent also remarked that judicial review of state taxation regimes involves difficult policy decisions beyond the scope of the courts:
This case is, at bottom, about policy choices: Should States prioritize ensuring that all who live or work within the State shoulder their fair share of the costs of government? Or must States prioritize avoidance of double taxation? As I have demonstrated, supra, at 16–19, achieving even the latter goal is beyond this Court’s competence. Resolving the competing tax policy considerations this case implicates is something the Court is even less well equipped to do. For a century, we have recognized that state legislatures and the Congress are constitutionally assigned and institutionally better equipped to balance such issues. I would reverse, so that we may leave that task where it belongs.
Scalia and Thomas' respective dissents consisted basically of fulminations against the notion that the Commerce Clause in the US Constitution (which is a grant of power to the federal Congress) somehow constitutes a bar to state action (known in the US as the "dormant commerce clause" principle). As usual, there are many delightful quotables in Scalia's decision, including describing the dormant commerce clause as a "judicial fraud" and stating that "The negative Commerce Clause applied today has little in common with the negative Commerce Clause of the 19th century, except perhaps for incoherence." Scalia and Thomas endorsed each other's opinions with the reservation that, while Thomas would abandon the dormant Commerce Clause theory altogether, Scalia is willing to retain it strictly for reasons of stare decisis but not extend it further.
This decision will no doubt prompt a host of other constitutional challenges to state tax regimes, so stay tuned! The decision also invites further discussion of whether the Canadian constitution (and specifically the “Trade and Commerce Clause” at subsection 91(2) of the
Constitution Act, 1867) creates a similar bar to the provinces’ taxing income which has already been subject to income tax in another province.
TAGS: Double Taxation, Inter-Jurisdictional Taxation, Supreme Court of the United States
CATEGORIES: Tax Case, Other