Implications of Wynne and Group Discussion

Transcription

1 Jeff Friedman, Partner Jon Maddison, Associate June 12, 2015 Implications of Wynne and Group Discussion 1

2 Maryland s Tax Regime Maryland imposes state and county income taxes on its residents. Maryland allows residents to claim a credit against the state tax for income taxes paid to other states. No credit is available against the county tax. Maryland also imposes its state tax on income nonresidents earn in Maryland, and it imposes a special tax on nonresidents in lieu of the county tax. 2

3 Procedural History Brian and Karen Wynne are Maryland residents who earned income from an S corporation in thirty-nine states in They challenged the Maryland tax by claiming an out-of-state income credit against the county tax, contrary to the Maryland tax regime. The Comptroller assessed a tax deficiency, and the Maryland Tax Court affirmed. The Circuit Court for Howard County reversed on Commerce Clause grounds, and the Maryland Court of Appeals affirmed the Circuit Court under the Complete Auto test, holding that the tax was discriminatory and unfairly apportioned. 3

4 The Supreme Court s Breakdown 4 Supreme Court affirms the Maryland Court of Appeals and strikes down Maryland s regime Four opinions: Justice Alito wrote the majority opinion, in which Chief Justice Roberts and Justices Kennedy, Breyer, and Sotomayor joined. Justice Ginsburg authored the principal dissent, in which Justices Scalia and Kagan joined. Justices Scalia and Thomas penned separate dissents. Three major issues: Does the dormant Commerce Clause limit a state s ability to tax its own residents? Do dormant Commerce Clause taxation limits apply equally to individual and corporate residents? Does the internal consistency test prohibit Maryland s taxation scheme?

5 Does the dormant Commerce Clause limit a state s ability to tax its own residents? The Majority Principal Dissent Scalia Dissent Answer Yes. Maybe, but not in this case. No, because the dormant Commerce Clause is a judicial fraud. Reasoning Stare decises Due Process Clause dormant Commerce Clause End of Goldberg dicta Key Language Maryland s raw power to tax its residents out-of-state income [without violating the Due Process Clause] does not insulate its tax scheme from scrutiny under the dormant Commerce Clause. Domicile is a secure ground for plenary taxation Reliance on Chickasaw Nation I hardly maintain... that the Commerce Clause places no constraint on a State s power to tax its residents. (quoting the majority opinion) More is given to the residents of a State than to [others], therefore more may be demanded of them. At founding, states imposed income taxes like this one The fundamental problem with our negative Commerce Clause cases is that the Constitution does not contain a negative commerce clause. 5

6 Do dormant Commerce Clause taxation limits apply equally to individual and corporate residents? The Majority Principal Dissent Scalia Dissent Answer Yes. No opinion expressed. N/A Reasoning Distinction irrelevant in past cases Corporations benefit from state services Corporations influence state governments decisions N/A N/A Key Language [I]t is hard to see why the dormant Commerce Clause should treat individuals less favorably than corporations. N/A N/A 6

7 Trajectory of Internal Consistency Container Corp. v. Franchise Tax Board (1983) The first... component of fairness in an apportionment formula is what might be called internal consistency--that is, the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business income being taxed. Armco, Inc. v. Hardesty (1984) A similar rule applies where the allegation is that a tax on its face discriminates against interstate commerce. Tyler Pipe Industries, Inc. v. Washington (1987) Washington s regime was the practical equivalent to the regime in Armco. American Trucking Associations, Inc. v. Scheiner (1987) Having paid one registration fee, a vehicle may pass among the States as freely as it may roam the State in which it is based; the Commerce Clause is not offended when state boundaries are economically irrelevant. 7

8 Trajectory of Internal Consistency Oklahoma Tax Commission v. Jefferson Lines (1995) If every State were to impose a tax identical to Oklahoma's, that is, a tax on ticket sales within the State for travel originating there, no sale would be subject to more than one State's tax. American Trucking Associations, Inc. v. Michigan Public Service Commission (American Trucking II) (2005) An interstate firm with local outlets normally expects to pay local fees that are uniformly assessed upon all those who engage in local business, interstate and domestic firms alike. 8

9 Does the internal consistency test prohibit Maryland s taxation scheme? The Majority Principal Dissent Scalia Dissent Answer Yes. No, because the test should not apply. N/A Reasoning Exists to reveal disincentives to interstate commerce Cure is for MD to provide credit for county tax or eliminate special nonresident tax Court has never required internal consistency MD could satisfy test without helping Wynnes (by eliminating special nonresident tax) Reliance on ATAII The test is not grounded in Constitution s text or structure The Court has applied it inconsistently Key Language [T]he internal consistency test reveals what the undisputed economic analysis shows: Maryland s tax scheme is inherently discriminatory and operates as a tariff. Maryland could... bring itself into compliance with the test... without removing the double tax burden the test is purportedly designed to cure. The internal consistency rule... nicely showcases our ad hocery. Before today, for two decades, the Court has not insisted that a tax under review pass the internal consistency test. 9

10 What s Next? What is the future of internal consistency? Suppose Maryland imposes the same partial credit regime, but does not enact the SNRT. What is the future of other local taxes imposed on residents and non-residents alike, with no credit regime in place? Philadelphia Earnings Tax 10

11 Questions? Jeffrey A. Friedman Sutherland Asbill & Brennan LLP Jonathan E. Maddison Sutherland Asbill & Brennan LLP

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