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Wynne and the Dormant Commerce
Clause (and more)
COST 2015 Spring Audit Session/ Income Tax
Conference
Memphis, Tennessee
April 23, 2015
Karl Frieden, COST, Moderator
Jane May, McDermott Will & Emery
Steven Wlodychak, EY
1
Agenda
 The Facts of the Case and the State Court
Decisions
 The Key Constitutional Arguments
 The Potential Impact of a Decision for Maryland
 Oral Arguments
April 23, 2015
Wynne and the Dormant Commerce Clause
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1
The Facts of the Case
and the State Court
Decisions
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Maryland Comptroller of the Treasury v. Wynne
– ISSUE: Does the dormant Commerce Clause require a
state to provide its residents an “other state tax credit”
against ALL income taxes levied by the state?

Maryland imposes two income taxes

State income tax (5%), and

County income tax (up to 3%)


Maryland resident S corporation shareholder paid taxes on
multistate tax business to all states

April 23, 2015
Reported and collected on the SAME FORM!
Not only claimed credit against the Maryland state
income tax (allowed specifically by statute) but also
against county tax (for which no statutory credit was
available)
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2
What Is Not in Dispute in the Wynne Case
– The undisputed facts in the case include:



The amount in dispute consists entirely of “business” income:
 The flow through income from the Wynne’s 2.4 percent
ownership of the S Corporation, Maxim Health Services Inc.
 The Wynnes’ salary income was sourced to and taxed fully by
Maryland.
Double taxation occurred here:
 The Wynnes were taxed on their flow through income from the
S Corporation (Maxim) in 38 states other than Maryland.
 Maryland only provided them with a credit for 60 percent of
these taxes paid to other states.
The S corporation income was properly sourced to the other
38 states.
April 23, 2015
Wynne and the Dormant Commerce Clause
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What Is Not in Dispute in the Wynne Case
– Maryland wants it both ways.


It seeks to tax residents such as the Wynnes on all of their
distributive share of the S corporation income – less the 60
percent credit allowed for taxes paid to other jurisdictions.
And it seeks to tax non-residents on all of their income sourced to
Maryland.
April 23, 2015
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Maryland Comptroller of the Treasury v. Wynne
– Procedural background:



Comptroller denied the refund claim for the county portion of tax

Tax Court upheld
Howard County Circuit Court (Judge Lewis Becker) overruled Tax Court
(80 page opinion!) (June 29, 2011):

County income tax authorized by state law.

Dormant Commerce Clause requires state to provide “other state tax
credit” not only against the state portion of the tax but also the
county portion of tax.

Failure to do so would, in effect, unconstitutionally favor in-state
investment over multistate business.
Comptroller appeals to Md. Special Court of Appeals;

Taxpayer petitions to appeal directly to Md. Ct. of Appeals (Md.’s
highest court)
Wynne and the Dormant Commerce Clause
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Maryland Comptroller of the Treasury v. Wynne
– Procedural background:

Md. Court of Appeals affirms Howard County Circuit court
(Jan. 28, 2013):

Failure to provide an “other state tax credit” against the
county income tax would violate dormant Commerce
Clause because it favors instate investment over out-ofstate investment.

Comptroller files petition for certiorari to US Supreme Court

US Supreme Court asks US Solicitor General for its
position

May 24, 2014 – US Supreme Court grants certiorari
April 23, 2015
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The Key Constitutional
Arguments
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Maryland Comptroller of the Treasury v. Wynne
Question Presented:
“Does the United States Constitution prohibit a state
from taxing all the income of its residents – wherever
earned – by mandating a credit for taxes paid on
income earned in other states?”
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Wynne and the Dormant Commerce Clause
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Maryland Comptroller of the Treasury v. Wynne
– Issues:

Due Process Clause? Commerce Clause? Both?

Commerce Clause




Does Commerce Clause apply to individuals?
Does Commerce Clause protect residents from
their own states?
How do Complete Auto tests apply in this context?
Can states tax on both the basis of residence and
source?
Wynne and the Dormant Commerce Clause
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April 23, 2015
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Maryland Comptroller of the Treasury v. Wynne
–
State of Maryland’s Argument:


Maryland can tax all income of its residents no matter
where earned. Oklahoma Tax Comm’r v. Chickasaw
Nation, 515 U.S. 450 (1995).

Justified by benefits state confers on residents

Justified by residents’ political power
Commerce Clause

April 23, 2015
Does not apply
 Was never intended to protect residents from taxation by
their own states. Goldberg v. Sweet, 488 U.S. 252 (1989)
or
 If applied, does not invalidate Maryland’s tax
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Maryland Comptroller of the Treasury v. Wynne
–
State of Maryland’s Argument: (cont’d)

Fairly apportioned because Maryland can tax 100% of its
residents’ income


The “fair share” of a resident’s income is ALL OF IT
Does not discriminate



Treats residents’ income the same regardless of where
earned
Does not impose disproportionate burdens on nonresidents
Even if problematic, results from multiple states taxing on
different bases
Wynne and the Dormant Commerce Clause
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Maryland Comptroller of the Treasury v. Wynne
– Wynnes’ Argument:


Due Process Clause does not invalidate Maryland’s tax.
Commerce Clause does.
 “Maryland’s tax therefore is obviously invalid if the usual
Commerce Clause rules apply. The only question for this
court, then, is whether they do. The answer is yes.”
 Commerce Clause prohibits burdens on interstate commerce
that subject it to double taxation (or the risk thereof) that
intrastate commerce does not bear.


Maryland’s tax “punishes residents for doing business across
state lines.”

April 23, 2015
MeadWestvaco Corp. v. Illinois Dep’t of Rev., 553 U.S. 16
(2008)
Violates Complete Auto test.
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The Potential Impact of
a Decision for Maryland
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The Consequences of a Maryland Win in Wynne
–
In 1980, 11 percent of all state and –
local taxes paid on business income
were collected under the individual
income tax (e.g. from S
Corporations, partnerships and sole
proprietors) compared to 89 percent
collected under the corporate
income tax.
By 2013, 41 percent of all
taxes paid on business
income were collected under
the individual income tax
compared to 59 percent
under the corporate income
tax.
–
–
In 1980, the percent of all
businesses (S Corporations,
partnerships and sole proprietors)
that paid tax under the individual
income tax was 83 percent
compared to 17 percent that paid
tax under the corporate income tax.
By 2007, the percent of all
businesses that paid tax
under the individual income
tax was 94 percent
compared to only 6 percent
that paid tax under the
corporate income tax.
April 23, 2015
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A Discriminatory Two-Tier System Under the Commerce Clause
– A decision for Maryland in the Wynne case would create a
discriminatory two-tier system for taxing interstate
commerce.

Commerce Clause protection against the double taxation of
income earned in a multistate business would not apply to
the 94 percent of business entities (e.g., S corporations,
partnerships, sole proprietors) that pay 41 percent of all
income taxes paid on business income under the individual
income tax.

Based on current trends, this amount will be about 50
percent of all income tax within the next two decades.
– How far does this apply – sales/use taxes, piggyback and
non-piggyback local income taxes, etc.?
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Oral Arguments
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Maryland Comptroller of the Treasury v. Wynne
– US Solicitor General Donald Virrilli, Jr.
Dormant Commerce Clause was not designed to, nor has it ever
been used to, protect citizens from their own state(!)
Citizens of a state have recourse:
 Vote for legislators who will change the law!
 Enact the “other state tax credit” against the county income
tax by legislation.


Wynne and the Dormant Commerce Clause
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Comptroller v. Wynne – US Supreme Court Hearing
– “Fair share”


Justice Scalia questioned Taxpayer on impact of tax credit
mechanism on “fair allocation” of taxes among similarly situated
residents
Sets up example – Neighbors with five kids (just like the Wynnes
had)




Both send kids to school, rely on local fire and police protection.
One neighbor earns ALL of her income in Maryland and pays all of
her income taxes to Maryland.
Other neighbor earns ALL of her income OUTSIDE of Maryland,
pays income taxes to other states and then takes a full “other state
tax credit” against Maryland income taxes – paying NOTHING to
Maryland.
Is that fair? Resident working out of state not paying taxes for
in-state services?
April 23, 2015
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Comptroller v. Wynne – US Supreme Court Hearing
– Resident v. Non-resident taxes

April 23, 2015
US Solicitor General’s argument focuses on nondiscriminatory nature of county resident tax

All residents, regardless of where income was earned,
were subject to the county tax at the same rate – there
was no discrimination

Court questions focused on the ENTIRE personal
income tax scheme as a whole, questioning interaction
of county income tax with the special compensatory
non-resident income tax intended to collect same tax on
non-residents

Justices questions seemed to suggest Maryland’s
personal income tax regime should be looked at in its
entirety
Wynne and the Dormant Commerce Clause
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US Supreme Court Hearing – Nov. 12, 2014 “Word of the Day”
April 23, 2015
Wynne and the Dormant Commerce Clause
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Comptroller v. Wynne – US Supreme Court Hearing
– Hawaiian Hot Dog Stand
JUSTICE BREYER: To be specific, you live in California. You have a hot
dog stand in Hawaii. All right? It has a $1,000 income. It comes back to
California. You pay 13½ California tax. Hawaii wants to charge another
12. So you're paying 25 percent. Can California say: That's fine; we give
them no credit for the 11 percent they're paying in Hawaii? So the
bottom check that you get is $750, not a 1,000. But if your hot dog stand
were in California, the check would not be 750, it would be
approximately 900. Okay?
Now, is that constitutional or not?

MR. BROCKMAN: It is, Your Honor.


JUSTICE BREYER: Okay. That's what I thought.
Then your answer -JUSTICE SCALIA: Move to Hawaii is what you're
saying.
(Laughter.)



Wynne and the Dormant Commerce Clause
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Comptroller v. Wynne – US Supreme Court Hearing
– Tariff?

Transcript of Hearing:
–
Justice Breyer (question for US S.G.
(pg. 22)):



April 23, 2015
“… I don't know who's at fault. Switzerland
has a tax on milk from cows that are pastured
at less than 5,000 feet. It's Belgium's fault.
They don't have any mountains.
(Laughter.)
I mean, I don't know who's at fault, but that is
a discriminatory tariff.
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Comptroller v. Wynne – US Supreme Court Hearing
– Tariff?




This is a state tax case. What the heck does a “tariff” have to do
with state taxes?
Justices Breyer and Alito and Chief Justice Roberts all
questioned whether the Maryland personal income tax system
acted as a tariff.
Neither the Taxpayer nor Maryland (nor the US Solicitor
General) briefed “tariffs”
Only appears in the Tax Economists’ Amicus Brief (pg. 4):
Wynne and the Dormant Commerce Clause
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Comptroller v. Wynne – US Supreme Court Hearing
– Tariff?



April 23, 2015
Why is all this important?
West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 193 (1994)
Justice Stevens:
 Because of their distorting effects on the geography of
production, tariffs have long been recognized as violative
of the Commerce Clause. In fact, tariffs against the
products of other States are so patently unconstitutional
that our cases reveal not a single attempt by any State to
enact one. Instead, the cases are filled with state laws that
aspire to reap some of the benefits of tariffs by other means.
…
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Comptroller v. Wynne – US Supreme Court Hearing
– Tariff? Import-Export Clause? State Taxes?



Justice Thomas has consistently held that there is no such thing
as the “dormant Commerce Clause”
Justice Scalia has said the same thing (but for longer) –
 Even in this case, he called it the “imaginary negative
Commerce Clause” (Transcript at pg. 10)
 American Trucking Assns., Inc. v. Smith, 496 U.S. 167, 204
(1990)
But … maybe there is another way – Import-Export Clause (?)
 Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520
U.S. 564, 610 (Thomas Dissent)

April 23, 2015
Not only international commerce, but interstate commerce
was the intent of this provision back in the 1780'
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So … How will the
Court Rule?
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14
So, how will Wynne be decided?
– DISCLAIMER! These are Steve’s picks ONLY

Not EY’s, MW&E’s, COST’s

Need 5 votes
For taxpayer: Tax
violates dormant
Commerce Clause;
discriminatory tax
For taxpayer: ImportExport Clause;
Unconstitutional Tariff





Alito
Kennedy
Breyer
Roberts
Sotomayor?

Dormant Commerce Clause survives
April 23, 2015


Thomas
Scalia (“imaginary
For state: dormant
Commerce Clause does
not protect residents
from own state


Ginsburg
Kagen
dormant commerce
clause”)
Wynne and the Dormant Commerce Clause
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QUESTIONS
Karl Frieden
Vice President and General Counsel
Council On State Taxation
[email protected]
202-484-5215
Jane May, Partner
McDermott Will & Emery
[email protected]
312-984-2115
April 23, 2015
Steven Wlodychak, Principal
State and Local Tax Leader
EY Center for Tax Policy
[email protected]
202-327-6988
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