On May 18, the United States Supreme Court issued its much-anticipated decision in Comptroller v. Wynne, 575 U.S.__ (2015). In the case, Maryland provided only a partial credit against the state income tax for residents paying taxes on income earned in, and paid to, a state outside of Maryland. The Court held that the scheme violated the dormant commerce clause, which prohibits state action placing an undue burden on interstate commerce. The Maryland income tax plan placed a heavier tax burden on income earned in interstate commerce than it did on income earned wholly in Maryland. The decision may affect Ohio’s school district and municipal income taxes.
Maryland Tax Scheme
Maryland imposes an income tax on its residents, regardless of where their income is earned. It also collects a county income tax, which is distributed back to the taxpayer’s county of residence. Maryland allows a credit against the state income tax for residents paying income taxes to other states, but the state does not allow a similar credit with respect to the county tax.
The Wynnes, residents of Maryland, earned pass-through income from a subchapter S corporation that earned its income in several states. The Wynnes paid income tax to those states and claimed a credit against Maryland’s state and county income taxes. The Comptroller denied the Wynnes the benefit of the credit against the county tax. On appeal, the trial court found that the failure to provide a credit against the county tax violated the commerce clause of the United States Constitution. The trial court’s verdict was upheld on appeal in the Maryland Court of Appeals. The Comptroller appealed that decision to the United States Supreme Court.
Supreme Court Analysis
The Supreme Court held that the failure to provide the credit against the county tax violated the dormant commerce clause. The commerce clause, Art. I, § 8, cl. 3, gives Congress the authority to regulate commerce between the states. The Court determined this provision contains a negative command, known as the dormant commerce clause, that prohibits states from discriminating against interstate commerce. Applying this provision, the Court held that the failure to provide the Wynnes a credit against the county tax resulted in their interstate commerce income being taxed twice.
The Court noted that the commerce clause analysis applied regardless of the nature of the tax as being imposed upon gross receipt or net income. It also held that the commerce clause analysis was not trumped by the fact that under the Due Process Clause, Maryland may have had the authority to tax the income in question.
Finally, the Court applied the “internal consistency” test, proving that the scheme violated the commerce clause. The internal consistency test helps the court to identify discriminatory tax schemes. Under the test, if every state adopted Maryland’s tax scheme, interstate commerce would be taxed at a higher rate than intrastate commerce.
There were two dissents. Justice Scalia, in typical form, dissented on the basis that the Constitution contains no dormant commerce clause. Hence, in his view, there was no basis for the Court’s analysis and decision, and the dormant commerce clause has no governing principle. Rules are developed as cases are presented. In conclusion, he noted that the dormant commerce clause analysis was improper, because rather than interpreting legal test, the court was balancing the needs of commerce and state government, which is not its function.
The “principal” dissent was written by Justice Ginsberg. The thrust of the principal dissent stated that nothing under the commerce clause, or under the Court’s prior rulings, provides that either the state of domicile, or the state in which the income is earned, must yield to the other in the area of taxation. It notes that the constitution contains no language that prefers the authority of one state over the other. That states offer a credit for tax paid to another state is done as a matter of tax policy, not as a matter of constitutional law. In the court’s view, the issue of whether Maryland offered its residents a full credit for tax paid to another state was merely a policy choice. The Court is neither equipped, nor empowered, to make such a determination.
Application to Ohio
The holding seems to indicate that a state of residence or domicile must somehow apportion its tax, perhaps by giving a full credit for all tax paid to another state, or run the risk of having its tax scheme declared invalid. While Ohio’s state income tax provides a credit for tax paid to another state (see R.C. 5747.05(B)), the school district income tax imposed under R.C. Chapter 5748 does not. The school district income tax, with respect to individuals who reside within the district, applies to the individual’s Ohio adjusted gross income as defined by the Ohio personal income tax law. This may include income earned outside Ohio and on which a tax may have been paid to another jurisdiction.
Under Ohio Constitution Art. XVIII Sec. 3 and 13, municipal corporations may impose a tax on income or net profits, subject to regulations imposed by state law. State law does not require a municipality to provide a credit for tax paid to another jurisdiction. Thompson v. City of Cincinnati, 2 Ohio St. 2d 292 (1965). Although most municipalities provide a credit for tax paid to another jurisdiction, in many cases the credit may not be complete. Based upon the reasoning employed by the Court in Wynne, the resident of a municipality that does not provide a complete credit may have a claim with respect to income earned outside Ohio that was subject to tax by another jurisdiction.