Tax practitioners who handle state and local matters are familiar with limitations on a state’s power to tax attributable to the Due Process Clause and the Commerce Clause of the U.S. Constitution. These limitations generally arise when a state attempts to assert sales tax on out-of-state sellers or assert corporate income tax on corporations that engage in business both in and out of state. It is less common for these U.S. constitutional issues to be raised in the context of state personal income tax. Because it was an unusual case, a great deal of attention was paid to the recent U.S. Supreme Court decision in Comptroller of the Treasury of Maryland v. Wynne,1 which held that the State of Maryland may not constitutionally deny Maryland resident taxpayers a credit for certain state income taxes paid to other states.
The court found that by both taxing nonresidents on income earned in Maryland and denying a credit to Maryland residents for tax on income earned in other states, Maryland exhibited a preference for income generated in state (since such income would only be taxed once), in violation of the Commerce Clause.
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