In 2015 the U.S. Supreme Court issued an important decision in Comptroller of Maryland v. Wynne. In that case, the Supreme Court held that Maryland violated the U.S. Constitution in taxing income that was already subject to tax by another state. The Court ruled that states must provide credits for individuals or businesses to avoid double-taxation on the same income. But less than five years later it’s become clear that the lower courts missed Wynne’s message. While we thought the Supreme Court’s decision in Wynne spoke clearly to the Dormant Commerce Clause problem presented when states tax income already subject to taxation elsewhere, we’ve seen recent cases where the lower courts brushed Wynne aside.
For example, the Mississippi Supreme Court issued a disappointing decision in Kansler v. Mississippi Department of Revenue—a case in which NFIB Small Business Legal Center filed an amicus brief arguing that Mississippi residents could not be taxed by the Mississippi Department of Revenue for income that the State of New York had decidedly ruled was subject to taxation in the Empire State. And now we see the New York courts ignoring Wynne on the other side of this equation.
NFIB Small Business Legal Center recently filed a brief urging the U.S. Supreme Court to grant certiorari in Edelman v. New York. As with the Kansler case, New York’s taxing authorities have concluded that individuals owe taxes on income from individuals living out-of-state. During the tax year in question, the Edelmans lived in Connecticut, which taxes all income from domiciled individuals; however, they were also told that they owe taxes on their income in New York because they worked and derived other income from New York sources. And as the Petition for certiorari puts it, the New York Courts “[thumbed their noses” at Wynne, “in an effort to protect New York’s aggressive double-taxation scheme…”
NFIB’s amicus brief argues that Edelman presents an opportunity for the Supreme Court to provide further guidance to the lower courts when evaluating regimes that seek to tax income subject to taxation in other jurisdictions. As in Wynne, we argue these schemes present a Dormant Commerce Clause problem because if every state adopted New York’s tax system it would disincentivize working or conducting business across state lines. And given that New York is a hub of finance and national commerce, it makes sense for the Court to grant certiorari.
On a related matter, our readers might be interested to know that the Legal Center is also urging the Supreme Court to reign-in extraterritorial taxation in Arizona v. California, which presents an important question as to whether individuals or businesses should be liable for taxes in a state for which they neither live nor do business. In this case California taxes out-of-state businesses simply on account of the fact that they may derive some passive income from independent business operating in the Golden State.
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