US Supreme Court – Absence of credit against Maryland’s local portion of personal income tax for out-of-state income taxes 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 the state’s personal income tax, with respect to tax paid to another state on pass-through income from an S corporation, was unconstitutional. Maryland’s tax scheme failed the dormant Commerce Clause’s internal consistency test because if every state adopted the scheme, interstate commerce would be taxed at a higher rate than intrastate commerce.

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.

The Court also recognized that although Maryland may have the power to impose the tax under the Due Process Clause, the tax may still violate the Commerce Clause if it impermissibly burdens interstate commerce.

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

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