The Lawletter Vol 40 No 8
A feature of recent U.S. presidential campaigns has been the interest of the press and the public (not to mention the requirements of the law) regarding the finances of those competing for the nomination and, ultimately, for the office itself. A key element of those finances has, of course, been the income tax returns of the various candidates. In this connection, one of the present candidates for the Republican nomination, Carly Fiorina, recently offered reporters who came in person to her campaign headquarters in Virginia the opportunity to review her state income tax returns.
Ms. Fiorina and her husband had already put their federal income tax returns for 2012 and 2013 online, but it is her state income tax returns that are of special interest. She and her husband were required to file such returns in no fewer than 17 states in 2013, with the couple's connection with some of those states so insubstantial that their tax liability in 11 of the states was less than $250. For instance, in Michigan, where the Fiorinas neither lived nor worked nor had ownership either of a business or of income-producing realty, the couple still incurred income tax liability because of their investment in a variety of funds in a number of states; one such fund generated $946 in income in 2013 for the Fiorinas that was attributable to Michigan. Their Michigan income tax return was 58 pages long, and the tax liability was $40.
While the inconvenience of filing multiple state income tax returns could be an issue in itself, a more serious problem arises where the resident taxpayer is not allowed a full credit for the payment of income tax in other states against his or her resident state income tax liability, resulting in double taxation. The U.S. Supreme Court ruled on such a situation on May 18, 2015 in the case of Treasury of Maryland Comptroller v. Wynne, 135 S. Ct. 1787 (2015), which involved Maryland's state income tax system.
Like many states, Maryland taxes the income that its residents earn both within and outside the state, as well as the income earned by nonresidents from sources within the state. Unlike most states, however, Maryland does not offer its residents a full credit against their Maryland income tax liability based on income taxes paid to other states. More specifically, Maryland imposes an income tax upon its residents under a two-part scheme, a "state" income tax and a "county" income tax (although both parts of the tax are regarded collectively as Maryland's state income tax). The controversy arose because in those instances where Maryland residents earn income in other states and that income is subject to tax in those other states, Maryland allows a credit for such tax liability in other states against the Maryland "state" income tax but not against the Maryland "county" tax. Thus, part of the income earned by a Maryland resident may be taxed twice.
The respondents, Brian and Karen Wynne, were Maryland residents who owned stock in a subchapter S corporation that earned income in 29 states other than Maryland. The Wynnes paid their income tax liability in those states and claimed a credit for such payments against both their Maryland state and county income tax liability. The petitioner, the Maryland State Comptroller, allowed the credit claimed by the Wynnes against the state tax but denied it as against the county tax. The Maryland Tax Court affirmed, but the Circuit Court for Howard County reversed on the basis that Maryland's income tax system violated what has become known in case law as the "dormant Commerce Clause."
That is, while the Commerce Clause grants Congress the power to "regulate Commerce . . . among the several States," U.S. Const. art. 1, § 8, cl. 3, the dormant Commerce Clause prohibits certain state taxation even in the absence of congressional legislation on the subject. Okla. Tax Comm'n v. Jefferson Lanes, Inc., 514 U.S. 175, 179 (1995). Maryland's highest state court, the Maryland Court of Appeals, affirmed on the basis that the risk of multiple taxation discriminated against interstate commerce because the denial of a full credit for residents based on taxes paid to other states resulted in Maryland residents incurring tax liability at a higher rate on income earned in interstate commerce. The Wynne Court affirmed:
[A] State "may not tax a transaction or incident more heavily when it crosses state lines than when it occurs within the State."
135 S. Ct. at 1794 (quoting Armco Inc. v. Hardesty, 467 U.S. 638, 642 (1964)). Perhaps Ms. Fiorina can make use of this precedent.