Supreme Court strikes down Maryland tax law

AP News
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Posted: May 18, 2015 2:17 PM

WASHINGTON (AP) — The Supreme Court on Monday struck down as unconstitutional a Maryland tax that has the effect of double-taxing income residents earn in other states.

Maryland officials say the 5-4 ruling means the loss of hundreds of millions of dollars in tax revenues. It also could affect similar tax laws in nearly 5,000 local jurisdictions in other states, including New York, Indiana, Pennsylvania and Ohio.

The justices agreed with a lower court that the tax is invalid because it discourages Maryland residents from earning money outside the state.

The unusual split wasn't along ideological lines. Writing for the court, Justice Samuel Alito said the tax "is inherently discriminatory" under the Constitution's Commerce Clause. The court has interpreted that provision to ban states from passing laws that burden interstate commerce.

Alito was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Sonia Sotomayor.

Maryland allowed its residents to deduct income taxes paid to other states from their Maryland state tax, but it did not apply that deduction to a local "piggy back" tax collected for counties and some city governments.

Maryland officials argued that the state has authority to tax all the income its residents earn to pay for local services like public schools and fire protection and police services.

The case arose after Maryland residents Brian and Karen Wynne challenged their tax bill. They had been blocked from deducting $84,550 that they had paid in income taxes to 39 other states. Brian Wynne's out-of-state income resulted from his ownership stake in a health care company that operates nationwide.

The Wynnes argued that Maryland was unfairly subjecting them to double taxation and taxing earnings that have no connection to the state.

Maryland's highest court ruled in 2013 that the tax violates the Constitution's Commerce Clause.

Maryland officials estimate the ruling will cost the state about $200 million in refunds it will have to pay residents going back seven or eight years. The decision also will cost local governments about $42 million annually.

In dissent, Justice Ruth Bader Ginsburg said nothing in the Constitution requires a state to avoid taxing its residents just because another state has a similar tax regime targeting the same income. She was joined in dissent by Justices Antonin Scalia and Elena Kagan.

Scalia also wrote separately to note his longtime opposition to "a judge-invented rule under which judges may set aside state laws that they think impose too much of a burden on interstate commerce." Clarence Thomas wrote separately to say the Commerce Clause cannot be used to strike down a state law.

Joe Henchman, vice president for legal projects at the Tax Foundation, a conservative Washington-based think tank, said the decision could jeopardize tax laws in other states. That includes telecommuter taxes that New York and some other states impose on people who work from home. These workers also face double taxation on income by their home state and the state in which their employer is located, he said.

"Any law that is justified by the idea that 'We're going to tax the out-of-staters more heavily than in-staters,' those laws should now be evaluated very closely to see their harms on interstate commerce," Henchman said.

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Associated Press writer Brian Witte in Annapolis, Maryland, contributed to this report.