US Supreme Court – Failure to provide credit to Maryland’s local portion of personal income tax for out-of-state income tax paid is unconstitutional

In a 5-4 decision, the United States Supreme Court found that the absence of a credit against the local portion of Maryland’s personal income tax, with respect to tax paid to another state on pass-through income from an S corporation, was unconstitutional. The tax failed the dormant Commerce Clause’s internal consistency test because if every state adopted Maryland’s tax scheme, interstate commerce would be taxed at a higher rate than intrastate commerce.  The Court noted that a Maryland resident earning income outside the state would experience double taxation due to paying tax in his state of residence and in the state where income is earned.

The Court further held that the tax is inherently discriminatory and operates as a tariff.

The Court rejected assertions that it reach a different result because applicable Supreme Court dormant Commerce Clause authority involves corporate gross receipts taxes.  The Court provided that its conclusion was not affected by the fact that the instant case involved a state’s personal income tax.

Accordingly, the Court affirmed the Maryland Court of Appeals decision in favor of the taxpayers.

A more detailed analysis will be forthcoming. Read more

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