Supreme Court: Two states can't tax the same income

Richard Wolf | USA TODAY

WASHINGTON — The Supreme Court came down against double taxation Monday in a case that could cost some states and cities millions of dollars.

The justices sided with taxpayers over governments in a case that tested Maryland's income tax system, which does not grant a full credit to residents who also pay income taxes in states where they work.

Maryland is among the few that collect some income taxes on residents who work out of state. Among others that could be affected are North Carolina and Wisconsin, along with New York City, Philadelphia, Cleveland, Detroit, St. Louis, Kansas City and Wilmington, Del., according to a brief filed by the International Municipal Lawyers Association.

Taxpayers affected by the ruling could file claims for refunds for any tax years that remain open. In Maryland, for instance, the court action could cost the state nearly $200 million.

It was a difficult decision for the justices to reach, taking six months since oral arguments were held and consuming 59 pages of opinions and dissents. That was apparently because both Maryland and two of its residents, Brian and Karen Wynne, had good arguments.

From the Wynnes' point of view, residents forced to pay taxes where they live and where they work are victims of double taxation. From the state's point of view, residents who don't pay as much as their neighbors get the same services cheaper.

The 5-4 opinion was written by Justice Samuel Alito, who noted that the tax scheme forces some residents to pay income taxes to more than one jurisdiction. States cannot tax non-residents' income earned in the state unless they provide full credit for income its residents earn outside the state, he said.

"The effect of this scheme is that some of the income earned by Maryland residents outside the state is taxed twice," Alito said. "Maryland's scheme creates an incentive for taxpayers to opt for intrastate rather than interstate economic activity."

Dissents came from Justices Ruth Bader Ginsburg, Antonin Scalia, Clarence Thomas and Elena Kagan, who defended Maryland's right — and, by extension, that of other states and municipalities — to tax all of its residents' income, no matter where it is earned or similarly taxed.

"More is given to the residents of a state than to those who reside elsewhere; therefore, more may be demanded of them," Ginsburg wrote in the main dissent.

"A taxpayer living in one state and working in another gains protection and benefits from both — and so can be called upon to share in the costs of both states' governments," she said.

The Wynnes are part owners of a company operating in several states. They paid state and county income taxes in Maryland and state income taxes elsewhere. They received a credit against the Maryland state tax, but not the county tax levied by the state.

The issue of double taxation seemed to worry the most justices when the case was argued in November. Chief Justice John Roberts and Alito each compared it to a tariff, which Wynne's lawyer, Dominic Perella, called "the quintessential unlawful tax."

William Brockman, the state's acting solicitor general, won some sympathy when he said Maryland shouldn't forfeit revenue it receives from residents who enjoy all state and local services, from schools to public safety.

"You don't get 18% of a firetruck or a day of school because you earned 82% elsewhere," he said. "You get 100%, just like your neighbor does."

For Maryland and other states with similar regimes, this decision will cause impacted taxpayers to file claims for refund for prior tax periods that remain open under the statute of limitations. In Maryland, the refund claims could be close to $200 million.