In a five-to-four decision, the United States Supreme Court held that the dormant commerce clause protects in-state residents from the double taxation of their interstate income. This is a complicated decision and the margin favoring the taxpayers was razor-thin, one vote.
- The decision is complicated because the tax involved was a county income tax collected by the State of Maryland on the income earned by the owner of an S corporation that did business in about 39 other states.
- The decision is razor-thin. I am personally disappointed that the Supreme Court was unable to cobble together a significant majority. Thus, the issue of a state’s discrimination against its own citizens cannot be considered as completely settled. New attempts by states to discriminate against their own residents could surface as soon as the membership on the Supreme Court changes.
But the Wynne holding is correct. Reading between the lines of this complicated case we come up with three very simple rules.
- States have the right to tax income earned within their respective geographical borders. This taxing right is primary since the states are essentially taxing the income producing activities that occur within their borders.
- States also have the right to tax the income of their in-state residents. This taxing right is secondary since states are not taxing income producing activity per se. Rather, the states are taxing individuals who live within their borders and therefore have a constitutionally recognized obligation to support financially the society within which they live.
- The so-called “dormant” Commerce Clause prohibits discriminatory taxes against interstate commerce. The Wynne case holds that taxation of income earned in interstate commerce is discriminatory if in-state residents are subjected to a double tax on the same income: first by the foreign state where the income is earned; and second by the state where the income earner resides.
It follows that since the Maryland tax on its residents is secondary, Maryland had the obligation to adjust its taxing mechanisms so that its residents would not pay a double tax on their interstate income.