A divided U.S. Supreme Court ruled that Maryland’s personal income tax regime is unconstitutional. Comptroller of the Treasury v. Wynne, 575 U.S. __ (2015). The Court affirmed the Maryland Court of Appeals in a 5-4 decision and held that Maryland unconstitutionally created the risk of multiple taxation.


Maryland imposes a state and county income tax on residents. To prevent double taxation of its residents, Maryland permits residents to claim a credit against the state income tax for income taxes that are paid to other states. However, a credit is not available against the county portion of the income tax. The Wynnes—Maryland residents and shareholders in a multistate Subchapter S corporation—challenged the absence of a credit on dormant Commerce Clause grounds. Maryland’s highest court held that the tax violated the dormant Commerce Clause of the U.S. Constitution by not allowing Maryland residents to claim a credit against the county portion of the income tax.1 Maryland sought review at the U.S. Supreme Court. The United States Solicitor General urged the Court to grant the petition, and it subsequently agreed to do so. The Court heard oral arguments on November 12, 2014.

Dormant Commerce Clause Applies to Taxation of Residents

Failure to Provide a Credit Results in Risk of Multiple Taxation

The majority opinion was authored by Justice Samuel Alito. He was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Sonia Sotomayor. Dissenting opinions were authored by Justices Antonin Scalia, Clarence Thomas, and Ruth Bader Ginsburg. Justice Ginsburg’s opinion was joined by Justices Scalia and Elena Kagan and is referred to as the “principal dissent.”

The Court held that Maryland’s personal income tax regime was unconstitutional because it created a risk of multiple taxation.2 The Court flatly rejected the argument that the dormant Commerce Clause’s prohibition against unfairly apportioned taxes should not apply to personal taxation: “We have long held that States cannot subject corporate income to tax schemes similar to Maryland’s and we see no reason why income earned by individuals should be treated less favorably.”3

Goldberg Dicta Limited

The court addressed the continuing relevancy of its misguided dicta in Goldberg v. Sweet that “[i]t is not a purpose of the Commerce Clause to protect state residents from their own state taxes.”4 Goldberg could not stand for the proposition that the Commerce Clause does not protect residents from their own state taxes. Indeed, the Court’s extended treatment of the dormant Commerce Clause issue inGoldberg itself would seem to have been unnecessary if resident taxpayers were deprived of Commerce Clause protections from their own state taxes because the challenged tax in that very case—at least in the vast majority of applications—came to rest on in-state residents. The application of the dormant Commerce Clause to residents should finally relegate the Goldberg dicta to irrelevancy.

Internal Consistency Test Proves Risk of Multiple Taxation

The Supreme Court grounded its decision in the application of the internal consistency test.5 This test, which was applied by the Court in Container Corp v. Franchise Tax Board6 and several cases since, is used by the Court to identify tax regimes that are unfairly apportioned and “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.”7 Maryland’s tax failed this test because Maryland residents who earn income in other states pay higher taxes than those residents who earn income entirely within Maryland. The Court held that “the internal consistency test reveals what the undisputed economic analysis shows: Maryland’s tax scheme is inherently discriminatory and operates as a tariff.”8

The Court seemed to see this ruling as the straightforward application of stare decisis: “Our existing dormant Commerce Clause cases all but dictate the result reached by Maryland’s highest court.”9 The Court relied primarily on three cases:J.D. Adams Mfg. Co. v. Storen,10  Gwin, White & Prince, Inc. v. Henneford,11 andCentral Greyhound Lines, Inc. v. Mealey.12 In each of these cases, the Court struck down a state tax scheme that created the risk of multiple taxation of income earned out of state and that discriminated in favor of intrastate over interstate economic activity.

Justice Ginsburg’s principal dissent attempted to distinguish these cases from the Maryland regime because the cases involved a tax on gross receipts, whereas this case involved a tax on net income. The Court rejected this distinction and concluded: “[W]e have now squarely rejected the argument that the Commerce Clause distinguishes between taxes on net and gross income.”13

Not only did the Court reaffirm existing precedent, but it also breathed new life into the internal consistency doctrine. To some observers, the internal consistency doctrine was limited in 2005. In American Trucking Association v. Michigan Public Service Commission, the Court upheld a flat tax on trucks engaged in intrastate hauling against a dormant Commerce Clause challenge.14 The challengers argued that the tax flunked the internal consistency test because if every state did the same, an interstate truck would have to pay fees totaling several hundred dollars were it to “top off” its business by carrying local loads in many other states. The Court “conceded” that the test resulted in duplicative taxation, but nevertheless upheld the law because “[a]n interstate firm with local outlets normally expects to pay local fees that are uniformly assessed upon all those who engage in local business, interstate and domestic firms alike.”15 Essentially, the Court held that although the tax failed the internal consistency test, it was nevertheless constitutional. What, then, was left of the internal consistency doctrine afterAmerican TruckingWynne answered that question by striking down Maryland’s personal income tax regime because it was not internally consistent.

Justice Ginsburg’s Principal Dissent

Justice Ginsburg authored the principal dissent and was joined by Justices Scalia and Kagan. Ginsburg’s dissent begins with the proposition—first articulated in her opinion in Oklahoma Tax Commission v. Chickasaw Nation16—that a state “may tax all the income of its residents, even income earned outside the taxing jurisdiction.”17 Ginsburg suggests that this principle, although grounded in the Due Process Clause, applies to this dormant Commerce Clause case. She argues that the Court has generally upheld “evenhanded taxes” in spite of “any adverse effects on interstate commerce” against dormant Commerce Clause challenges.18 A state has the raw power to tax its residents on their world-wide income, and this power is not “diminished by another State’s independent interest” in taxing that same income.19 To Ginsburg, a state’s ability to tax its residents’ income exceeds a state’s ability to tax non-residents on that same income.20

The Court rejected Ginsburg’s elevation of Due Process concerns above dormant Commerce Clause concerns. Ginsburg’s argument, the Court said, “confuses what a State may do without violating the Due Process Clause . . . with what it may do without violating the Commerce Clause.”21 The dissent failed to “identify a single case that endorses its essential premise, namely that the Commerce Clause places no constraint on a State’s power to tax the income of its residents wherever earned.”22

Ginsburg’s dissent picks up a point she raised during oral argument regarding the services enjoyed by the residents of a state to justify Maryland’s collection of taxes from its residents regardless of whether tax was paid to another state. For example, Maryland spent more than $11 billion to fund public schools—a service only local residents can enjoy. Ginsburg reasoned that “[a] taxpayer’s home State, then, can hardly be faulted for making support of local government activities an obligation of every resident, regardless of any obligations residents may have toother States.”23

The Court rejected this justification for multiple taxation:

This argument fails because corporations also benefit heavily from state and local services. Trucks hauling a corporation’s supplies and goods, and vehicles transporting its employees, use local roads. Corporations call upon local police and fire departments to protect their facilities. Corporations rely on local schools to educate prospective employees, and the availability of good schools and other government services are features that may aid a corporation in attracting and retaining employees. Thus, disparate treatment of corporate and personal income cannot be justified based on the state services enjoyed by these two groups of taxpayers.24

Justice Scalia and the “Judicial Fraud”

Justice Scalia colorfully emphasized his distaste of the Court’s dormant Commerce Clause jurisprudence, at one point calling it a “judicial fraud.”25 While he agreed with Ginsburg’s principal dissent, he wrote separately “to point out how wrong our negative Commerce Clause jurisprudence is in the first place. . . .”26First, Scalia rejects the notion that the dormant Commerce Clause exists—frequently referring to it as the “Synthetic Commerce Clause” and the “Imaginary Commerce Clause.”27 Second, Scalia argues that the Court’s jurisprudence lacks a governing principle, is inconsistent and unstable.28 He articulates the tests the Court uses to adjudicate dormant Commerce Clause Claims—including the internal consistency test—as “ad hoc.”29 He identifies seemingly inconsistent applications of the test by the Court, including in ATA II.30 Even with these critiques of the dormant Commerce Clause, Scalia reaffirmed that he will vote to strike down a tax if it is facially discriminatory against interstate commerce. He concluded that Maryland’s tax did not violate his test and thus voted to uphold it.

What’s Next?

By striking down Maryland’s personal income tax regime, the state must issue refunds to taxpayers who were subjected to duplicative taxation. In an effort to reduce its potential liability, Maryland enacted special retroactive legislation to reduce the applicable interest rate for refunds issued in the wake of the Court’s decision. Expect challenges to this legislation in Maryland court on numerous grounds, likely including the Due Process Clause.

The Court’s opinion left open the door for Maryland to achieve the same end—imposing a local income tax credit regime—without violating the dormant Commerce Clause. The Court did “not foreclose the possibility that [Maryland] could comply with the Commerce Clause” in some other way than “cur[ing] the problem . . . by granting a credit for taxes paid to other State. . . .”31   What would such a regime look like? Would removing the non-resident tax pass internal consistency and cure the constitutional defect? It is unclear whether Maryland will join every other state and provide a full credit for taxes paid to other states, or will try its hand at drafting a new personal income tax regime.