Philadelphians Wynne, New Yorkers Wynne-Less

May 29, 2015

By Gary C. Bingel, CPA and Matthew Wilk

On Monday, May 18, 2015, the U.S. Supreme Court issued its ruling in Comptroller of the Treasury of Maryland v. Wynne, holding, in a 5-4 decision, that Maryland’s tax scheme violated the Commerce Clause as internally inconsistent, and was thus unconstitutional on its face.


Maryland’s personal income tax scheme in question has two components: a state component and a county component.  Similar to most states, Maryland taxes its residents on their entire income wherever it is earned. Maryland also taxed non-residents on their portion of income earned within Maryland’s borders.  Maryland permits its residents a credit for the income taxes they pay to other states.  However, this credit is only applicable against the state level tax.  Maryland does not allow a credit against the county component of the tax.  The state tax and county tax have the same tax bases, and are filed on the same return.

Brian and Karen Wynne were shareholders of an S corporation doing business in 39 states. In 2006, they paid income tax to most of those states on the income that flowed through to their individual return. On their Maryland return, the Wynnes claimed a tax credit for taxes paid to other states. The Maryland Comptroller permitted the Wynnes to claim a credit against the state income tax, and denied a credit on the county income tax.

The Decision

The Court analyzed the case under the Commerce Clause of the U.S. Constitution.  In order to pass scrutiny under the Commerce Clause, a tax must be both internally and externally consistent.  The Court focused on the internal consistency analysis.  In order to be internally consistent, no more than 100% of income can be subject to taxation if every jurisdiction imposes an identical tax.

In the case at hand, Maryland taxed residents on their entire income, as well as non-residents on their share of income earned within Maryland, and only offered a partial credit to residents for taxes paid to other jurisdictions.  If every state had an identical tax, more than 100% of a person’s earned income would be subjected to taxation since they would pay tax on all their income in their resident state, and a portion of their income in their non-resident state, and only get a partial credit.  Thus, the Maryland tax scheme was held to violate the Commerce Clause as it was internally inconsistent because:

  1. Residents are taxed on their entire income, wherever earned;
  2. Non-residents are taxed on the portion of their income earned within the state; AND
  3. Maryland did not provide a full credit for taxes paid to other jurisdictions to Maryland residents against their Maryland state and county income tax.

Going forward, Maryland residents who were denied a full credit may qualify for refunds for prior years still open under the statute of limitations, as well as potentially take a full credit against both the state and county levels of tax.  Per the Maryland Department of Revenue’s website, “further action is being considered” and “taxpayers are advised to speak with a tax professional to determine whether the case affects them.”

The Implications in Other Jurisdictions

Accordingly, in order for a similar tax in another jurisdiction to fail the internal consistency test, the following three factors must all be present:

  1. Residents must be taxed on their entire income, wherever earned;
  2. Non-residents must be taxed on the portion of their income earned within the state; AND
  3. Less than a full credit must be given to residents for the portion of income taxed in other jurisdictions.

City of Philadelphia

Philadelphia imposes two taxes, the Net Profits Tax and the Wage Tax, that appear to meet the three criteria set forth above and thus fail the internal consistency test of the Commerce Clause.
The Net Profits Tax is an income tax imposed on unincorporated entities, including partnerships, doing business in Philadelphia.  The tax considers whether there are resident and non-resident partners, members, and proprietors of the taxpayer.  While the portion of the tax attributable to non-residents partners, members, and proprietors is apportioned, the portion attributable to Philadelphia residents is not apportioned.  Also, there is a lack of a credit mechanism to grant resident partners a credit for taxes paid to other jurisdictions.  The Wage Tax operates in a similar fashion – Philadelphia residents are taxed on their entire wages, without any type of offsetting credit, and non-residents are taxed on the wages earned within the city.
Accordingly, any Philadelphia residents who paid taxes on their wages to local jurisdictions other than Philadelphia may want to consider filing for refunds based on the taxes paid to such other jurisdictions.  Likewise, businesses such as partnerships that pay a significant amount of taxes to other localities (such as for New York City’s Unincorporated Business Tax), with significant Philadelphia resident ownership, may also want to consider filing for refunds.  Due to the interaction of the Philadelphia Business Income and Receipts Tax credit against the Net Profits Tax, this issue can be highly fact-sensitive.

New York

While it may appear at first glance that the Wynne decision has some application for New York City residents, upon closer examination it appears otherwise.  While New York City taxes its residents on 100% of their income, and declines to offer any credit for taxes paid to other jurisdictions, the fact that it fails to tax nonresidents renders it internally consistent, thereby differentiating it from Maryland tax scheme analyzed in the Wynne case, and saving it from a Constitutional review. 

There may be an argument that New York’s statutory residence scheme, under which statutory residents are taxed on 100% of their investment income, is internally inconsistent.  However, one potentially important distinction may be that the Wynne case involved earned income, as opposed to investment/passive income.  While one would think the same principles should apply regardless of the type of income involved, the Wynne Court appeared to limit its holding to earned income, and cases often are decided on such minor distinctions.   Further, taxpayers may have been permitted credits in their other resident state for taxes paid to New York.  That being said, those individuals who have been subjected to significant double-taxation on investment income in New York City and New York State may want to consider filing refund claims for open years in order to preserve their rights.

Ironically, New York has had a chance to remedy this inequitable (and possibly unconstitutional) dilemma for close to twenty years.  In October 1996, the New York Department of Taxation and Finance signed the North Eastern States Tax Officials Association (“NESTOA”) Cooperative Agreement on Determination of Domicile.  This cooperative agreement addressed these very issues of revenue sourcing and dual residency, and would avoid the issues confronted in Wynne.  Unfortunately, New York failed to enact this agreement into law, and has refused to follow the provisions of the agreement. 

About Gary Bingel

Gary Bingel's expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

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