MARYLAND STATE COMPTROLLER OF TREASURY v. WYNNE
Brian Wynne and his wife are Howard County, Maryland residents who own stock in Maxim Healthcare Services, Inc. (Maxim), a company that provides health care services nationally. Maxim’s income is “passed through” to its owners, and the owners are then taxed individually. In 2006, Maxim filed income tax returns in 39 states and allocated a share of taxes paid to each shareholder. The Wynnes claimed the share of Maxim’s income taxes that they paid as a credit against their Maryland individual income tax, which includes Maryland state taxes and Howard County taxes. The Comptroller of Maryland determined that the Wynnes had incorrectly calculated their county tax credit by including the taxes they had paid to other states and issued an assessment for the remaining tax owed. The Wynnes appealed to the Hearings and Appeals Section of the Comptroller’s Office, which noted that the wrong county tax rate had been applied initially and revised the assessment, but nonetheless affirmed that the tax credit was limited to Maryland state taxes and not applicable to Howard County taxes.
The Wynnes appealed to the Maryland Tax Court and argued that the limitation violated the dormant Commerce Clause of the Constitution. The Tax Court rejected the Wynnes’ argument and affirmed the revised assessment. The Wynnes then appealed to the Maryland Circuit Court for Howard County. The Circuit Court reversed the Tax Court’s decision and held that the county tax without a credit violated the dormant Commerce Clause. The Comptroller appealed to the Maryland Court of Appeals and argued that the Commerce Clause was not implicated by the county tax. The Maryland Court of Appeals affirmed the Circuit Court by finding that the county tax implicates the dormant Commerce Clause because it affects the interstate market for capital and business investment and the overlapping power to tax income from such sources. The Maryland Court of Appeals held that the county tax without a credit violated the Commerce Clause because the county tax is not fairly apportioned, since taxpayers who earn income from interstate activities would be taxed at higher rates than taxpayers who earn income exclusively in Maryland while the tax covers income earned wholly outside of Maryland. The Maryland Court of Appeals also held that the county tax is discriminatory against interstate commerce since it favors businesses that do business primarily in Maryland.
Does the dormant Commerce Clause of the Constitution prohibit states from taxing all the income of their residents by mandating a credit for taxes paid related to income earned in other states?