SCOTUS to decide on double taxation across state lines
posted at 9:31 am on June 1, 2014 by Jazz Shaw
A rather wonky interstate commerce case has been granted a writ of certiorari and will be heard by the Supreme Court during the fall session. The reason this particular petition should interest you is that it has the potential to affect so many people, specifically those who derive income from any sources outside the state where they live. As explained in this Forbes article, the fundamental question being put to the court is as follows:
Does the United States Constitution prohibit a state from taxing all the income of its residents — wherever earned — by mandating a credit for taxes paid on income earned in other states?
The specifics of the original case:
In this case, a married couple, the Wynnes, reported taxable net income of approximately $2.7 million. More than half of that amount represented a share of earnings in an S corporation with operations in several states. The Wynnes claimed a credit on their Maryland tax returns for taxes paid to 39 other states but not for any county or local government taxes. The State of Maryland denied the credits and issued a notice of deficiency and the Wynnes appealed. At a hearing, the assessment was affirmed.
So the Wynnes lost the first two rounds in court, even though they were apparently taxed by the states where the income was generated and then taxed again in Maryland But they then amended their original request, asking the courts to answer the question, “whether a state had the unconditional right to tax all income based on residency.”
When they phrased it that way, the Circuit Court agreed with the Wynnes. The state appealed and the Court of Appeals sides with the Wynnes as well, since they were being subjected to double taxation. Not suprisingly, the Obama administration has weighed in with an amicus curiae brief supporting the state, though their argument mainly seems to be, Hey! This could cut out a lot of tax money!
The feds argued in their brief that “though States often choose to grant tax credits to their residents for income taxes paid in other States, nothing in the Commerce Clause compels a State to offer such credits or otherwise defer to other States in the taxation of its own residents’ income.” Further, “[t]he decision… may lead to challenges to similar tax schemes in other jurisdictions; and is inconsistent with statements made by the highest courts in other States.”
Don’t expect a quick answer here, since we’ll be lucky to have a decision by Christmas. But as wonky as it may sound, you should probably keep an eye on this one. It doesn’t only affect wealthy investors. If you commute across state lines for work and don’t receive a full credit for taxes paid in the state where you work, this could directly impact your bottom line too.