On May 18, 2015, the United States Supreme Court ruled in a 5-4 decision that Maryland’s personal income tax scheme violates the Commerce Clause of the United States Constitution by denying residents a full credit for personal income taxes paid to other states while subjecting nonresidents to personal income tax on all income derived from Maryland sources.
Here are five takeaways from the decision:
- The dormant Commerce Clause protects individual taxpayers in the same manner as it does corporate taxpayers.
- If a state’s tax unconstitutionally discriminates against interstate commerce, it is invalid regardless of whether it is imposed on residents or nonresidents.
- Maryland’s income tax scheme failed the internal consistency test because Maryland residents that earn income from out-of-state will pay more total state taxes than Maryland residents that earn income solely from Maryland sources.
- The majority opinion rejected a strict rule of priority for source-based taxation over residency-based taxation, noting that Maryland could remedy the infirmity in its tax scheme by offering a credit against income taxes paid to other states.
- In dissent, Justice Ginsburg stated that it should simply be a matter of state policy to offer residents a credit for taxes paid to other states, and that the Court’s ruling did establish a preference for source-based taxation over residency-based taxation contrary to a principle repeatedly acknowledged by the Court that a “nation or State may tax all the income of its residents, even income earned outside the taxing jurisdiction.”