A recent Maryland Court of Appeals decision found that the “failure to allow a credit with respect to the county income tax for out-of-state income taxes paid to other states on “pass-through” income earned in those states discriminates against interstate commerce and violates the Commerce Clause of the federal Constitution.”

In this case, Maryland State Comptroller of the Treasury v. Brian Wynne, et ux., Mr. Wynne challenged the Maryland statute, arguing that the statute violated the Commerce Clause because it burdened Maryland residents that conducted interstate business.

Below is a summary of the findings and opinion.

The Maryland income tax law imposes a tax, consisting of the “state income tax” and a “county income tax,” on all of the income of a Maryland resident, whether that income is earned within the state or outside of the state. With respect to income earned outside of Maryland, the taxpayer may also owe income tax
to other states on that income. The Maryland tax code allows a credit for income taxes paid to other states with respect to the state income tax, but not with respect to the county income tax. Under both federal and Maryland law, a Subchapter S corporation is deemed to “pass through” its income to its shareholders who are taxed on that income at the shareholder’s level. The failure to allow a credit with respect to the county income tax for out-of-state income taxes paid to other states on “pass-through” income earned in those states discriminates against interstate commerce and violates the Commerce Clause of the federal
Constitution.

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