The US Supreme Court recently put a stop to the Maryland’s use of double taxation in which a resident’s income could be taxed by the state of Maryland, even if the income was generated and already taxed in another state. The US Supreme Court deemed this a violation of the US Constitution.
Currently the state of Maryland taxes a resident on worldwide income through state and county taxation. Maryland’s tax code only gives a credit for state income tax that is double taxed (taxed in a jurisdiction outside of Maryland, and again in the state of Maryland), but does not credit the county tax portion.
Additionally, nonresidents with income earned in Maryland are required to pay a state income tax. Those that may be exempt from state income tax are still subject to a nonresident tax.
The case that brought this practice to light stems back from residents who claim they did not receive a tax credit for their county income tax as expected, which resulted in them facing a tax deficiency.
The Court of Appeals of Maryland found the state in violation of the Commerce Clause, by restricting interstate commerce through their tax code. The state of Maryland sent the case to the U.S. Supreme Court on appeal but it was ruled against.
Comptroller of the Treasury of Maryland vs. Wynne, as the case is known, is a win for Maryland state residents who have been double taxed in the past. Residents who have already paid full taxes in another state and have been taxed again in Maryland will now be able to file claims against the state. Claims in Maryland are estimated to be almost $200 million and have a significant financial impact on revenues.
The ruling aligns with the Dormant Commerce Clause, which prevents states from using multiple taxation that strains interstate commerce.
Managing editor at Bloomberg BNA, Steven Roll, calls the decision an affirmation of constitutional protection for individuals, as well as small businesses, to guard against the practice of double taxation by states.