It’s too bad the United States Supreme Court didn’t issue its ruling in Comptroller v. Wynne in time for the 2014 tax season. In early May 2015, the nation’s highest Court ruled in favor of a couple in Maryland who argued that part of Maryland’s state tax regime was unconstitutional because it failed to give them a tax credit for taxes paid on income in another state’s county, municipality, or other local taxing authority. The couple, the Wynne’s, are Maryland residents that held stock in an S-Corporation which had gained income in other U.S. states in the taxable year, and they had paid state level and sub-state level taxes on that out-of-state income in states other than Maryland. Maryland’s tax code requires the Wynne’s to pay income tax on that out-of-state income to the state of Maryland in addition to the tax paid on that income in other states, resulting in a double tax on that income. While Maryland allows individuals a tax credit for taxes paid to the state-level taxing authority in other states, it does not allow individuals a tax credit for payment of taxes to out-of-state municipal, county, or other local taxing authority lower than the state level. In Wynne, the United States Supreme Court held that Maryland’s disallowance of a credit for an individual’s payment of tax to an out-of-state county, municipality, or other sub-state level taxing authority violates the dormant Commerce Clause because the disallowance provides those individuals who only engage in commerce within a particular state with an advantage, while it burdens those residents who engage in interstate commerce with a double tax.
Maryland is one of the few remaining states that have such a tax regime, but among these few remaining states is Wisconsin, which has an identical stance that allows tax credits for individuals who pay taxes to state level tax authorities but disallows credits for payment on out-of-state income to any sub-state level taxing authority. See Tax Publication 125, (January 2015), page 2, ¶ D. While most municipalities, counties, or other taxing authorities, such as school districts, at least in Wisconsin, derive much of their tax revenue from sales taxes and property taxes, many sub-state level taxing authorities outside Wisconsin impose income taxes in addition to the state level income tax. For example, about 80% of Iowa school districts impose a surtax that requires individuals to pay additional tax to a local school district on income earned in Iowa for a taxable year. These school districts are allowed to tax as much as 20% of the Iowa state income tax required to be paid to the state in the taxable year. Many other nearby states such as Michigan, Indiana, Ohio, and several other U.S. states also have some type of sub-state level income tax. For all those Wisconsin residents doing business or working with the jurisdiction of out-of-state taxing authority, under current Wisconsin law, you must pay an income tax both to Wisconsin and to the out-of-state sub-level taxing authority, but cannot receive any credit in Wisconsin for the payment to the out-of-state sub-state level taxing authority.
In light of this Wynne ruling, it remains to be seen whether the Wisconsin Department of Revenue will change their stance to allow tax credits for out-of-state payments. With the Wisconsin law and the Maryland law being virtually identical, there isn’t much wiggle room for Wisconsin to continue to disallow these credits. Though the Wisconsin law has not be expressly ruled unconstitutional by the Supreme Court like the Maryland law was in this case, it’d be surprising if the Wisconsin Department of Revenue didn’t to join the vast majority of states that allow a credit across the board for out-of-state income tax payments to sub-state level taxing authorities. However, if the Department of Revenue continues to disallow these credits for the 2015 tax year, it would be doing so in spite of controlling precedent from the nation’s highest Court.
Schober Schober & Mitchell will stay tuned to any changes on the Wisconsin Department of Revenue’s stance on this issue.
This article is the combined effort of Thomas Schober and our law clerk, Jeremy Klang.