Maryland Business Groups Urge Supreme Court to End State’s Double Taxation of S-Corporations

A taxpayer with income from an out-of-state S-corporation often has to pay out-of-state taxes. The taxpayer’s home state usually gives the taxpayer a tax credit for those tax payments. But, that is not quite what happens in Maryland. The constitutionality of Maryland’s refusal to give full tax credits for out-of-state taxes on S-corps is now being challenged in a case before the United States Supreme Court.

Maryland taxpayer Brian Wynne owed a percentage of an S-corp doing business across the country, and he paid taxes to other states on his out-of-state income. He applied for a credit for the amount paid out-of-state to his Maryland taxes. Maryland refused to allow all of the credit, however. They permitted him to offset Maryland state taxes but not county income tax.

According to ten organizations that have just filed amicus briefs with the Supreme Court, this practice impedes interstate commerce, in violation of the Commerce Clause of the U.S. Constitution. The Commerce Clause gives Congress the power to regulate interstate commerce. According to the so-called “dormant Commerce Clause” doctrine, states may not interfere with or discriminate against interstate commerce.

The Maryland Chamber of Commerce, in its brief, warned that Maryland is a “small business” state with many S-corps, most of which do business across state lines. Briefs filed by other organizations also argue against taxing S-corporation income first where the income originates and again in Maryland. The Council on State Taxation noted that, because larger corporations are treated differently, the ruling would discriminate against S-corporations and create a two-tier system of taxation.

The American Association of Attorney-Certified Public Accountants rejected the idea that, because the tax was a “county” income tax, it was constitutionally different from a state income tax. The “dormant Commerce Clause” applies to local taxes as well as state taxes, its brief says.

Groups ranging from the National Association of Publicly Traded Partnerships to the American Legislative Exchange Council have made similar arguments.

For individuals deciding where to do business, where to live, and where to invest, the case could have far-reaching implications. If decided in Maryland’s favor, the case would mean that some level of double taxation of out-of-state business income is constitutionally permissible, paving the way for other states to follow suit.

Experts on Maryland business and tax law can advise you on how the case might affect your business and tax planning. The experienced corporate and tax attorneys at Longman & Van Grack can advise you on taxation of S-corporations and on all the other significant issues that may have an impact on your strategy. Call us at (301) 291-5027 for a consultation.