In what is considered by many to be a landmark decision in favor of taxpayers, the U.S. Supreme Court narrowly struck down Maryland’s double taxation scheme as unconstitutional. The issue in Wynne vs. Maryland, was whether Maryland’s taxing scheme of not allowing a resident taxpayer a credit for taxes paid in other states was in violation of the U.S. Constitution’s dormant Commerce Clause, which provides Congress with the authority to ensure that a state’s authority does not discriminate against or excessively burden interstate commerce. The U.S. Supreme Court ruled that by not allowing a resident taxpayer a credit for taxes paid in other states, Maryland’s taxation scheme did in fact provide excessive burden on Maryland residents. Basically, Maryland is punishing taxpayers for making money in multiple states.

While this case dealt specifically with Maryland’s taxation scheme, the prevailing assumption was that a ruling by the U.S. Supreme Court could have drastic effects on all states that impose an income tax. Most states, including California, provide a credit to resident taxpayers for income taxes paid in other states. Had the U.S. Supreme Court found in favor of Maryland’s taxation scheme, many other states could have taken this decision to mean that a credit for taxes paid in other states or other relief to resident taxpayers was in fact not a requirement under the dormant Commerce Clause. It was really more up to the state’s discretion. Basically, does the state want to play nice with resident taxpayers or not? Many within the state and local tax world considered this the most important U.S. Supreme Court since 1992, when the Court ruled that a state could not impose a sales tax reporting responsibility on a company without physical presence (see Quill vs. North Dakota).

If a number of states, including California, had discretion as to whether to provide relief for resident taxpayers for taxes paid in other states, then this could have a drastic effect on the tax situation for those involved in the entertainment industry, including actors/actresses, director/producers and the film crew. With the global nature of film production these days, many California-based residents travel to film in other states. Often times they are filing income tax returns and paying taxes in other states. Already hit with the highest personal income tax rates in the country as California residents, if California had within their discretion to limit the amount of credits that can be taken for taxes paid in other states, many California-based residents within the entertainment industry would likely look for greener pastures. Can you imagine if a California resident paid tax in California on all income at a rate of 12.3 percent and paid tax in New York on the same income at 7.1 percent without any corresponding tax credit in California?

The U.S. Supreme Court’s decision in Wynne vs. Maryland all but ensures that this sort of blatant double taxation scheme will not happen.