Some have called it the most important state and local tax case that the United States Supreme Court has heard in 20 years. The case is Maryland v. Wynne and it concerns the extent to which a state must provide credits for taxes paid to other states.
The Wynnes, shareholders of an S corporation, paid income tax as non-residents in states where their business operated. The Wynnes then claimed a credit on their resident Maryland income tax returns for the tax paid in other states. There is nothing unusual or controversial about that. The problem, though, is that Maryland has a dual income tax – imposed at both the state and county levels – and the Wynnes claimed a credit against both taxes. Maryland denied the credit taken against the county income tax, the Wynnes protested, Maryland’s highest court ruled in their favor, and now they find themselves at the U.S. Supreme Court with oral argument scheduled for November 12, 2014.
The case is an intersection of two competing constitutional principles. On the one hand, the Commerce Clause demands fair apportionment and prohibits discrimination, which can be interpreted to mean a prohibition on double taxation. The Wynnes claim that, without the benefit of a credit against the county income tax, they are being double taxed. On the other hand, Maryland claims that the Due Process Clause permits it to tax all the income of its residents with virtually no limitations, including no requirement to provide credits to its own citizens. It will be up to the Supreme Court to resolve the conflict.
Who is following the case? Of course, tax accountants, tax lawyers and tax professors are all interested in the outcome. And so is Sammy Sosa, former Cubs outfielder and a former plaintiff in an Illinois income tax case. Illinois has an unusual provision in its law that – in short – denies a credit for taxes paid by a resident employee to another state if the employee’s employer is based in Illinois. Sosa was an Illinois resident for tax purposes who paid tax to other states where the Cubs played. The Illinois Department of Revenue denied the credit claimed by Sosa on his Illinois returns because the Cubs are an Illinois based employer. A Circuit Court judge ruled for the DOR – relying on the Due Process Clause to conclude that Illinois could essentially tax its residents however it wanted – and the case eventually settled. The Illinois provision, however, is still on the books.
It is impossible to say how the US Supreme Court will rule in the Wynne case but its impact on cases like the Sammy Sosa case is unmistakable. A decision in favor of Maryland validates the Illinois rule and really the rule of any state that arguably double taxes its residents. A decision in favor of the Wynnes, however, calls those rules into question and could lead to a flood of refund claims – perhaps even one by Sammy Sosa himself.