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Comptroller v. Wynne: An Important Case for Maryland Residents

As technology improves and travel becomes easier, it is not uncommon for individuals to live and work in different states. Although federal tax on your income is the same whether or not you work and live in the same state, have you considered the state tax implications of working in a different state from which you reside?

Generally, states have the authority to tax all income, no matter where it is earned. To avoid double-taxation, an individual who works in one state and lives in another must file two state tax returns reporting the same earnings. The state where he or she resides gives a credit against taxes paid to the state where he or she works. Note that Maryland has reciprocity agreements with Virginia, District of Columbia, Pennsylvania and West Virginia so individuals who live there and work in Maryland only file one return - in the state they reside.

Maryland is special in that it imposes an income tax on the state and county level. For those frequent-traveling Maryland residents who earn income out-of-state, Maryland provides a state tax credit but not a county tax credit. This can result in double taxation.

A new case before the Supreme Court of the United States addresses the issue regarding Maryland personal income tax imposed on residents earning income out-of-state. In Comptroller of the Treasury of Maryland v. Wynne, the issue before the Supreme Court is whether the United States Constitution requires states to prevent double taxation of income earned in other states. Brian and Karen Wynne are residents of Howard County in Maryland. They earn most of their income through ownership in a company, Maxim Healthcare Services, an S-corporation. Because S-corporation's income is taxed at the owners' level, the Wynnes report the income on their personal tax return. A substantial part of Maxim's income was earned outside Maryland, for which the Wynnes received a tax credit against the state tax paid but not the county tax. In contesting their 2006 income tax liability, the Wynnes argued that by failing to afford a tax credit against county tax paid, Maryland violated the dormant Commerce Clause.

The Maryland Court of Appeals had found that the existing rule of not providing a credit for county taxes paid on income earned outside Maryland was "not fairly apportioned" and violated interstate commerce. In laymen's terms, by not crediting the county tax, Maryland treated those Maryland residents working in the state differently from those that do not. In addition, by having unequal treatment, interstate commerce suffers because folks in Maryland are incentivized to work inside the state. Maryland filed a writ of certiorari appealing the Court of Appeals' decision. The Supreme Court granted review and heard oral arguments in November of 2014.

In its briefs and in oral arguments, Maryland contends that granting credits against taxes paid to other states for its own residents is discretionary. Citing benefits provided to residents, such as public schools and public assistance programs, it argues that it provides beneifts to its residents that nonresidents do not get. It also argues that the U.S. Constitution is silent on priority - whether a state gets "first dibs" on taxing its residents or the source of income. On the other hand, the Wynnes argue that the Commerce Clause prohibits states from creating a multiple taxation situation.

Should you, like many other Marylanders, work outside Maryland, the outcome of this case may be of interest to you.

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