In Comptroller v. Wynne (Docket No. 13-485, May 18, 2015), the U.S. Supreme Court ruled that Maryland’s personal income tax scheme unfairly discriminates against interstate commerce.

(Read full article on this ruling.)

Here are five key things you need to know about the ruling and what it means for your clients:

  1. Currently a state may tax the income of its residents regardless of where that income is earned. Likewise, a state may tax a nonresident on income earned within that state. As a result, a taxpayer may end up being “taxed twice” when the income is taxed by both the individual’s state of residence as well as the state where the income was generated.
  2. Per the Court, the law in Maryland created an incentive for taxpayers to opt for intrastate rather than interstate economic activity. The majority of justices held that Maryland fails the internal consistency test (assuming that if every state adopted Maryland’s tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce) and by undisputed economic analysis that Maryland’s tax scheme is inherently discriminatory and operates as a tariff.
  3. Since other states have similar taxing provisions and will need to remedy their double tax situations, this ruling may have far-reaching effects and could impact your clients.
  4. The granting of the full credit on the taxes paid to the other states will result in a decrease in the state’s treasury. Maryland (and other states impacted in the future) will therefore need to address this shortfall by either reducing services or increasing tax rates.
  5. Tax rulings like this one provide you with new opportunities to solidify client relationships and increase your billable hours. Advise your clients about the potential impact on them and help create a plan to optimize their tax situation.