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US Supreme Court to hear corporate tax case in upcoming term


If a local tax does not allow a credit for taxes paid on income earned in other states is it unconstitutional? That is the question that the Supreme Court will review in its next term.

The United States Supreme Court is selective about the cases it decides. Each term, our nation’s highest court issues approximately 80 decisions. This is from the thousands of requests it receives. It is for this reason that is noteworthy the court has agreed to hear a corporate tax issue case this term.

The court granted a petition for certiorari submitted by the state of Maryland. This in effect just means that the Supreme Court justices have agreed to review the case of Comptroller v. Wynne.

The case has to do with how states tax individual and corporate income earned in other states. As posed in the petition, the question is “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?”

Dormant Commerce Clause

A “prohibition against multiple taxation” or allowing two jurisdictions to tax the same income is found in the dormant Commerce Clause. Thus, income cannot be subject to both a Washington and Oregon state tax. What usually happens is that if you have a company doing business in different states, you pay income taxes on what you earn to the state in which you earned the money. This is accomplished by the use of credits.

In the Supreme Court case, a Maryland couple had income of several million dollars. More than half of their earnings came from their share of an S corporation that operated in several states. The couple claimed a credit on their Maryland taxes for what they paid to 39 other states. Maryland did not allow the credit to offset their county income tax bill. While the tax court upheld the assessment of county taxes, the Maryland appellate courts reversed holding the county tax unconstitutional since it did not provide a credit.

The state argues that the decision could lead to significant lost annual revenue for local jurisdictions. It acknowledges that most states provide credits for taxes paid to other states, but county and local taxing authorities should not be subject to “onerous refund claims.” The federal government submitted a friend of the court brief supporting the state. Their brief argues that the Commerce Clause does not compel states to offer credits and the Maryland decision could lead to challenges of county and local taxes across the country.

Oral arguments will be scheduled for the court’s next term. A final decision will issue sometime next year. In the meantime, some local taxing authorities may worry about forecasting revenues.

As this case demonstrates, taxation and apportionment between multiple jurisdictions becomes complicated. If you have concerns about double taxation or find that a credit has been disallowed, contact a local taxation attorney for assistance.

Keywords: Tax credits, IRS audit