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U.S. Supreme Court Won't Allow Double Taxes on Out-of-State Income
U.S. Supreme Court Accuses Maryland of Violating Commerce Clause
Washington area residents who work in the District or Virginia but live in Maryland have won a tax break with a U.S. Supreme Court ruling.
The Supreme Court ruled Maryland’s income tax law is unconstitutional for failing to provide a full tax credit to residents who earn income outside the state.
Until the 5-to-4 ruling in Comptroller of the Treasury of Maryland v. Wynne this week, Maryland declined to give residents a credit on the county portion of income tax they paid in other states.
The ruling said the policy forces some residents to pay double taxation, which violates the Commerce Clause of the Constitution by discouraging interstate business.
Maryland is one of the few states that does not give their residents a credit for income taxes they pay on out-of-state earnings.
The ruling affects about 55,000 Maryland residents, most of them in the Washington area. Many of them could be eligible for refunds on state taxes they paid between 2006 and 2014, which the state comptroller estimates could be as much as $200 million.
Small business owners also would benefit by being able to avoid paying Maryland tax on income they earned and for which they paid taxes in another state.
Montgomery County officials warned the ruling is likely to cause big shortfalls in their annual budget. The county could be forced to repay $115 million in refunds and lose $24 million in tax revenue, according to state officials.
Attorneys for Maryland argued the due process clause of the Constitution’s 14th Amendment gives states a historic right to tax their residents’ income, regardless of where it is earned.
The ruling written by Justice Samuel A. Alito Jr. disagreed, saying Maryland’s tax policy is inherently discriminatory and operates as a tariff that restricts trade.
The case is Comptroller of the Treasury of Maryland v. Wynne, U.S. Sup.Ct., No. 13-485 (May 18, 2015).