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SUPREME COURT OF THE UNITED STATES
_________________
No. 13–485
_________________
COMPTROLLER OF THE TREASURY OF
MARYLAND,PETITIONER
v. BRIAN WYNNE et ux.
on writ of certiorari to the court of appeals
of maryland
[May 18, 2015]
Justice Alito delivered the opinion of the
Court.
This case involves the constitutionality of an
unusual feature of Maryland’s personal income tax scheme.
Like many other States, Maryland taxes the income its residents
earn both within and outside the State, as well as the income that
nonresidents earn from sources within Maryland. But unlike most
other States, Maryland does not offer its residents a full credit
against the income taxes that they pay to other States. The effect
of this scheme is that some of the income earned by Maryland
residents outside the State is taxed twice. Maryland’s scheme
creates an incentive for taxpayers to opt for intrastate rather
than interstate economic activity.
We have long held that States cannot subject
corporate income to tax schemes similar to Maryland’s, and we
see no reason why income earned by individuals should be treated
less favorably. Maryland admits that its law has the same economic
effect as a state tariff, the quintessential evil targeted by the
dormant Commerce Clause. We therefore affirm the decision of
Maryland’s highest court and hold that this feature of the
State’s tax scheme vio-lates the Federal Constitution.
I
Maryland, like most States, raises revenue in
part by levying a personal income tax. The income tax that Maryland
imposes upon its own residents has two parts: a “state”
income tax, which is set at a graduated rate, Md. Tax-Gen. Code
Ann. §10–105(a) (Supp. 2014), and a so-called
“county” income tax, which is set at a rate that varies
by county but is capped at 3.2%, §§10–103,
10–106 (2010). Despite the names that Maryland has assigned
to these taxes, both are State taxes, and both are collected by the
State’s Comptroller of the Treasury.
Frey v.
Comptroller of Treasury, 422 Md. 111, 125, 141–142, 29
A. 3d 475, 483, 492 (2011). Of course, some Maryland residents earn
income in other States, and some of those States also tax this
income. If Maryland residents pay income tax to another
jurisdiction for income earned there, Maryland allows them a credit
against the “state” tax but not the
“county” tax. §10–703; 431 Md. 147,
156–157, 64 A. 3d 453, 458 (2013) (case below). As a result,
part of the income that a Maryland resident earns outside the State
may be taxed twice.
Maryland also taxes the income of nonresidents.
This tax has two parts. First, nonresidents must pay the
“state” income tax on all the income that they earn
from sources within Maryland. §§10–105(d) (Supp.
2014), 10–210 (2010). Second, nonresidents not subject to the
county tax must pay a “special nonresident tax” in lieu
of the “county” tax. §10–106.1;
Frey,
supra, at 125–126, 29 A. 3d, at 483. The
“special nonresident tax” is levied on income earned
from sources within Maryland, and its rate is “equal to the
lowest county income tax rate set by any Maryland county.”
§10–106.1. Maryland does not tax the income that
nonresidents earn from sources outside Maryland. See
§10–210.
Respondents Brian and Karen Wynne are Maryland
residents. In 2006, the relevant tax year, Brian Wynne owned stock
in Maxim Healthcare Services, Inc., a Subchapter S
corporation.[
1] That year,
Maxim earned income in States other than Maryland, and it filed
state income tax returns in 39 States. The Wynnes earned income
passed through to them from Maxim. On their 2006 Mary-land tax
return, the Wynnes claimed an income tax credit for income taxes
paid to other States.
Petitioner, the Maryland State Comptroller of
the Treasury, denied this claim and assessed a tax deficiency. In
accordance with Maryland law, the Comptroller allowed the Wynnes a
credit against their Maryland “state” income tax but
not against their “county” income tax. The Hearings and
Appeals Section of the Comptroller’s Office slightly modified
the assessment but otherwise affirmed. The Maryland Tax Court also
affirmed, but the Circuit Court for Howard County reversed on the
ground that Maryland’s tax system violated the Commerce
Clause.
The Court of Appeals of Maryland affirmed. 431
Md. 147, 64 A. 3d 453. That court evaluated the tax under the
four-part test of
Complete Auto Transit, Inc. v.
Brady, 430 U. S. 274 (1977), which asks whether a
“tax is applied to an activity with a substantial nexus with
the taxing State, is fairly apportioned, does not discriminate
against interstate commerce, and is fairly related to the services
provided by the State.”
Id., at 279. The Court of
Appeals held that the tax failed both the fair apportionment and
nondiscrimination parts of the
Complete Auto test. With
respect to fair apportionment, the court first held that the tax
failed the “internal consistency” test because if every
State adopted Maryland’s tax scheme, interstate commerce
would be taxed at a higher rate than intrastate commerce. It then
held that the tax failed the “external consistency”
test because it created a risk of multiple taxation. With respect
to nondiscrimination, the court held that the tax discriminated
against interstate commerce because it denied residents a credit on
income taxes paid to other States and so taxed income earned
interstate at a rate higher than income earned intrastate. The
court thus concluded that Maryland’s tax scheme was
unconstitutional insofar as it denied the Wynnes a credit against
the “county” tax for income taxes they paid to other
States. Two judges dissented and argued that the tax did not
violate the Commerce Clause. The Court of Appeals later issued a
brief clarification that “[a] state may avoid discrimination
against interstate commerce by providing a tax credit, or some
other method of apportionment, to avoid discriminating against
interstate commerce in violation of the dormant Commerce
Clause.” 431 Md., at 189, 64 A. 3d at 478.
We granted certiorari. 572 U. S. ___
(2014).
II
A
The Commerce Clause grants Congress power to
“regulate Commerce . . . among the several
States.” Art. I, § 8, cl. 3. These
“few simple words . . . reflected a central concern
of the Framers that was an immediate reason for calling the
Constitutional Convention: the conviction that in order to succeed,
the new Union would have to avoid the tendencies toward economic
Balkanization that had plagued relations among the Colonies and
later among the States under the Articles of Confederation.”
Hughes v.
Oklahoma, 441 U. S. 322 –326
(1979). Although the Clause is framed as a positive grant of power
to Congress, “we have consistently held this language to
contain a further, negative command, known as the dormant Commerce
Clause, prohibiting certain state taxation even when Congress has
failed to legislate on the subject.”
Oklahoma Tax
Comm’n v.
Jefferson Lines, Inc., 514 U. S.
175, 179 (1995) .
This interpretation of the Commerce Clause has
been disputed. See
Camps Newfound/Owatonna, Inc. v.
Town
of Harrison, 520 U. S. 564 –620 (1997) (Thomas, J.,
dissenting);
Tyler Pipe Industries, Inc. v.
Washington
State Dept. of Revenue, 483 U. S. 232 –265 (1987)
(Scalia, J., concurring in part and dissenting in part);
License
Cases, 5 How. 504, 578–579 (1847) (Taney, C. J.). But it
also has deep roots. See,
e.g., Case of the State Freight
Tax, 15 Wall. 232, 279–280 (1873);
Cooley v.
Board of Wardens of Port of Philadelphia ex rel. Soc. for Relief
of Distressed Pilots, 12 How. 299, 318–319 (1852);
Gibbons v.
Ogden, 9 Wheat. 1, 209 (1824) (Marshall,
C. J.). By prohibiting States from discriminating against or
imposing excessive burdens on interstate commerce without
congressional approval, it strikes at one of the chief evils that
led to the adoption of the Constitution, namely, state tariffs and
other laws that burdened interstate commerce.
Fulton Corp.
v.
Faulkner, 516 U. S. 325 –331 (1996);
Hughes,
supra, at 325;
Welton v.
Missouri, 91 U. S. 275, 280 (1876) ; see also The
Federalist Nos. 7, 11 (A. Hamilton), and 42 (J. Madison).
Under our precedents, the dormant Commerce
Clause precludes States from “discriminat[ing] between
transactions on the basis of some interstate element.”
Boston Stock Exchange v.
State Tax Comm’n, 429
U. S. 318 , n. 12 (1977). This means, among other things,
that a State “may not tax a transaction or incident more
heavily when it crosses state lines than when it occurs entirely
within the State.”
Armco Inc. v.
Hardesty, 467
U. S. 638, 642 (1984) . “Nor may a State impose a tax
which discriminates against interstate commerce either by providing
a direct commercial advantage to local business, or by subjecting
interstate commerce to the burden of ‘multiple
taxation.’ ”
Northwestern States Portland
Cement Co. v.
Minnesota, 358 U. S. 450, 458 (1959)
(citations omitted).
B
Our existing dormant Commerce Clause cases all
but dictate the result reached in this case by Maryland’s
highest court. Three cases involving the taxation of the income of
domestic corporations are particularly instructive.
In
J. D. Adams Mfg. Co. v.
Storen,
304 U. S. 307 (1938) , Indiana taxed the income of every
Indiana resident (including individuals) and the income that every
nonresident derived from sources within Indiana.
Id., at
308. The State levied the tax on income earned by the plaintiff
Indiana corporation on sales made out of the State.
Id., at
309. Holding that this scheme violated the dormant Commerce Clause,
we explained that the “vice of the statute” was that it
taxed, “without apportionment, receipts derived from
activities in interstate commerce.”
Id., at 311. If
these receipts were also taxed by the States in which the sales
occurred, we warned, interstate commerce would be subjected
“to the risk of a double tax burden to which intrastate
commerce is not exposed, and which the commerce clause
forbids.”
Ibid.
The next year, in
Gwin, White & Prince,
Inc. v.
Henneford, 305 U. S. 434 (1939) , we
reached a similar result. In that case, the State of Washington
taxed all the income of persons doing business in the State.
Id., at 435. Washington levied that tax on income that the
plaintiff Washington corporation earned in shipping fruit from
Washington to other States and foreign countries.
Id., at
436–437. This tax, we wrote, “discriminates against
interstate commerce, since it imposes upon it, merely because
interstate commerce is being done, the risk of a multiple burden to
which local commerce is not exposed.”
Id., at 439.
In the third of these cases involving the
taxation of a domestic corporation,
Central Greyhound Lines,
Inc. v.
Mealey, 334 U. S. 653 (1948) , New York
sought to tax the portion of a domiciliary bus company’s
gross receipts that were derived from services provided in
neighboring States.
Id., at 660; see also
id., at 665
(Murphy, J., dissenting) (stating that the plaintiff was a New York
corporation). Noting that these other States might also attempt to
tax this portion of the company’s gross receipts, the Court
held that the New York scheme violated the dormant Commerce Clause
because it imposed an “unfair burden” on interstate
commerce.
Id., at 662 (majority opinion).
In all three of these cases, the Court struck
down a state tax scheme that might have resulted in the double
taxation of income earned out of the State and that discriminated
in favor of intrastate over interstate economic activity. As we
will explain, see Part II–F,
infra, Maryland’s
tax scheme is unconstitutional for similar reasons.
C
The principal dissent distinguishes these
cases on the sole ground that they involved a tax on gross receipts
rather than net income. We see no reason why the distinction
between gross receipts and net income should matter, particularly
in light of the admonition that we must consider “not the
formal language of the tax statute but rather its practical
effect.”
Complete Auto, 430 U. S., at 279. The
principal dissent claims,
post, at 13 (opinion of Ginsburg,
J.), that “[t]he Court,
historically, has taken the
position that the difference between taxes on net income and taxes
on gross receipts from interstate commerce warrants different
results.” 2 C. Trost & P. Hartman, Federal Limitations on
State and Local Taxation 2d §10:1, p. 251 (2003) (emphasis
added) (hereinafter Trost). But this historical point is
irrelevant. As the principal dissent seems to acknowledge, our
cases rejected this formal distinction some time ago. And the
distinction between gross receipts and net income taxes was not the
basis for our decisions in
J. D. Adams,
Gwin,
White, and
Central Greyhound, which turned instead on
the threat of multiple taxation.
The discarded distinction between taxes on gross
receipts and net income was based on the notion, endorsed in some
early cases, that a tax on gross receipts is an impermissible
“direct and immediate burden” on interstate commerce,
whereas a tax on net income is merely an “indirect and
incidental” burden.
United States Glue Co. v.
Town
of Oak Creek, 247 U. S. 321 –329 (1918); see also
Shaffer v.
Carter, 252 U. S. 37, 57 (1920) .
This arid distinction between direct and indirect burdens allowed
“very little coherent, trustworthy guidance as to tax
valid-ity.” 2 Trost §9:1, at 212. And so, beginning with
Justice Stone’s seminal opinion in
Western Live Stock
v.
Bureau of Revenue, 303 U. S. 250 (1938) , and
continuing through cases like
J. D. Adams and
Gwin,
White, the direct-indirect burdens test was replaced with a
more practical approach that looked to the economic impact of the
tax. These cases worked “a substantial judicial
reinterpretation of the power of the States to levy taxes on gross
income from interstate commerce.” 1 Trost §2:20, at
175.
After a temporary reversion to our earlier
formalism, see
Spector Motor Service, Inc. v.
O’Connor, 340 U. S. 602 (1951), “the gross
receipts judicial pendulum has swung in a wide arc, recently
reaching the place where taxation of gross receipts from interstate
commerce is placed on an equal footing with receipts from local
business, in
Complete Auto Transit Inc. v.
Brady,” 2 Trost §9:1, at 212. And we have now
squarely rejected the argument that the Commerce Clause
distinguishes between taxes on net and gross income. See
Jefferson Lines, 514 U. S., at 190 (explaining that the
Court in
Central Greyhound “understood the gross
receipts tax to be simply a variety of tax on income”);
Moorman Mfg. Co. v.
Bair, 437 U. S. 267, 280
(1978) (rejecting a suggestion that the Commerce Clause
distinguishes between gross receipts taxes and net income taxes);
id., at 281 (Brennan, J., dissenting) (“I agree with
the Court that, for purposes of constitutional review, there is no
distinction between a corporate income tax and a gross-receipts
tax”);
Complete Auto,
supra, at 280 (upholding
a gross receipts tax and rejecting the notion that the Commerce
Clause places “a blanket prohibition against any state
taxation imposed directly on an interstate
transaction”).[
2]
For its part, petitioner distinguishes
J. D.
Adams,
Gwin, White, and
Central Greyhound on the
ground that they concerned the taxation of corporations, not
individuals. But it is hard to see why the dormant Commerce Clause
should treat individuals less favorably than corporations. See
Camps Newfound, 520 U. S., at 574 (“A tax on real
estate,
like any other tax, may impermissibly burden
interstate commerce” (emphasis added)). In addition, the
distinction between individuals and corporations cannot stand
because the taxes invalidated in
J. D. Adams and
Gwin, White applied to the income of both individuals and
corporations. See Ind. Stat. Ann., ch. 26, §64–2602
(Burns 1933) (tax in
J. D. Adams); 1935 Wash. Sess.
Laws ch. 180, Tit. II, §4(e), pp. 710–711 (tax in
Gwin, White).
Attempting to explain why the dormant Commerce
Clause should provide less protection for natural persons than for
corporations, petitioner and the Solicitor General argue that
States should have a free hand to tax their residents’
out-of-state income because States provide their residents with
many services. As the Solicitor General puts it, individuals
“reap the benefits of local roads, local police and fire
protection, local public schools, [and] local health and welfare
benefits.” Brief for United States as
Amicus Curiae
30.
This argument fails because corporations also
benefit heavily from state and local services. Trucks hauling a
corporation’s supplies and goods, and vehicles transporting
its employees, use local roads. Corporations call upon local police
and fire departments to protect their facilities. Corporations rely
on local schools to educate prospective employees, and the
availability of good schools and other government services are
features that may aid a corporation in attracting and retaining
employees. Thus, disparate treatment of corporate and personal
income cannot be justified based on the state services enjoyed by
these two groups of taxpayers.
The sole remaining attribute that, in the view
of petitioner, distinguishes a corporation from an individual for
present purposes is the right of the individual to vote. The
principal dissent also emphasizes that residents can vote to change
Maryland’s discriminatory tax law.
Post, at 3–4.
The argument is that this Court need not be concerned about state
laws that burden the interstate activities of individuals because
those individuals can lobby and vote against legislators who
support such measures. But if a State’s tax
unconstitutionally discriminates against interstate commerce, it is
invalid regardless of whether the plaintiff is a resident voter or
nonresident of the State. This Court has thus entertained and even
sustained dormant Commerce Clause challenges by individual
residents of the State that imposed the alleged burden on
interstate commerce,
Department of Revenue of Ky. v.
Davis, 553 U. S. 328, 336 (2008) ;
Granholm v.
Heald, 544 U. S. 460, 469 (2005) , and we have also
sustained such a challenge to a tax whose burden was borne by
in-state consumers,
Bacchus Imports, Ltd. v.
Dias,
468 U. S. 263, 272 (1984) .[
3]
The principal dissent and Justice Scalia respond
to these holdings by relying on dictum in
Goldberg v.
Sweet, 488 U. S. 252, 266 (1989) , that it is not the
purpose of the dormant Commerce Clause “ ‘to
protect state residents from their own state
taxes.’ ”
Post, at 3 (Ginsburg, J.,
dissenting);
post, at 5 (Scalia, J., dissenting). But we
repudiated that dictum in
West Lynn Creamery, Inc. v.
Healy, 512 U. S. 186 (1994) , where we stated that
“[s]tate taxes are ordinarily paid by in-state businesses and
consumers, yet if they discriminate against out-of-state products,
they are unconstitutional.”
Id., at 203. And, of
course, the dictum must bow to the holdings of our many cases
entertaining Commerce Clause challenges brought by residents. We
find the dissents’ reliance on
Goldberg’s dictum
particularly inappropriate since they do not find themselves
similarly bound by the rule of that case, which applied the
internal consistency test to determine whether the tax at issue
violated the dormant Commerce Clause. 488 U. S., at 261.
In addition, the notion that the victims of such
discrimination have a complete remedy at the polls is fanciful. It
is likely that only a distinct minority of a State’s
residents earns income out of State. Schemes that discriminate
against income earned in other States may be attractiveto
legislators and a majority of their constituents for precisely this
reason. It is even more farfetched to suggest that natural persons
with out-of-state income are better able to influence state
lawmakers than large corporations headquartered in the State. In
short, petitioner’s argument would leave no security where
the majority of voters prefer protectionism at the expense of the
few who earn income interstate.
It would be particularly incongruous in the
present case to disregard our prior decisions regarding the
taxation of corporate income because the income at issue here is a
type of corporate income, namely, the income of a Subchapter S
corporation. Only small businesses may incorporate under Subchapter
S, and thus acceptance of petitioner’s submission would
provide greater protection for income earned by large Subchapter C
corporations than small businesses incorporated under Subchapter
S.
D
In attempting to justify Maryland’s
unusual tax scheme, the principal dissent argues that the Commerce
Clause imposes no limit on Maryland’s ability to tax the
income of its residents, no matter where that income is earned. It
argues that Maryland has the sovereign power to tax all of the
income of its residents, wherever earned, and it there-fore reasons
that the dormant Commerce Clause cannot constrain Maryland’s
ability to expose its residents (and nonresidents) to the threat of
double taxation.
This argument confuses what a State may do
without violating the Due Process Clause of the Fourteenth
Amendment with what it may do without violating the Commerce
Clause. The Due Process Clause allows a State to tax
“
all the income of its residents, even income earned
outside the taxing jurisdiction.”
Oklahoma Tax
Comm’n v.
Chickasaw Nation, 515 U. S. 450
–463 (1995). But “while a State may, consistent with
the Due Process Clause, have the authority to tax a particular
taxpayer, imposition of the tax may nonetheless violate the
Commerce Clause.”
Quill Corp. v.
North Dakota,
504 U. S. 298, 305 (1992) (rejecting a due process challenge
to a tax before sustaining a Commerce Clause challenge to that
tax).
Our decision in
Camps Newfound
illustrates the point. There, we held that the Commerce Clause
prohibited Maine from granting more favorable tax treatment to
charities that operated principally for the benefit of Maine
residents. 520 U. S., at 580–583. Because the plaintiff
charity in that case was a Maine nonprofit corporation, there is no
question that Maine had the raw jurisdictional power to tax the
charity. See
Chickasaw Nation,
supra, at
462–463. Nonetheless, the tax failed scrutiny under the
Commerce Clause.
Camps Newfound,
supra, at
580–581. Similarly, Maryland’s raw power to tax its
residents’ out-of-state income does not insulate its tax
scheme from scrutiny under the dormant Commerce Clause.
Although the principal dissent claims the mantle
of precedent, it is unable to identify a single case that endorses
its essential premise, namely, that the Commerce Clause places no
constraint on a State’s power to tax the income of its
residents wherever earned. This is unsurprising. As cases like
Quill Corp. and
Camps Newfound recognize, the fact
that a State has the jurisdictional power to impose a tax says
nothing about whether that tax violates the Commerce Clause. See
also,
e.g., Barclays Bank PLC v.
Franchise Tax Bd. of
Cal., 512 U. S. 298 (1994) (separately addressing due
process and Commerce Clause challenges to a tax);
Moorman,
437 U. S. 267 (same);
Standard Pressed Steel Co. v.
Department of Revenue of Wash., 419 U. S. 560 (1975)
(same);
Lawrence v.
State Tax Comm’n of Miss.,
286 U. S. 276 (1932) (separately addressing due process and
equal protection challengesto a tax);
Travis v.
Yale
& Towne Mfg. Co., 252 U. S. 60 (1920) (separately
addressing due process and privileges-and-immunities challenges to
a tax).
One good reason why we have never accepted the
principal dissent’s logic is that it would lead to plainly
untenable results. Imagine that Maryland taxed the income that its
residents earned in other States but exempted income earned out of
State from any business that primarily served Maryland residents.
Such a tax would violate the dormant Commerce Clause, see
Camps
Newfound,
supra, and it cannot be saved by the principal
dissent’s admonition that Maryland has the power to tax all
the income of its residents. There is no principled difference
between that hypothetical Commerce Clause challenge and this
one.
The principal dissent, if accepted, would work a
sea change in our Commerce Clause jurisprudence. Legion are the
cases in which we have considered and even upheld dormant Commerce
Clause challenges brought by residents to taxes that the State had
the jurisdictional power to impose. See,
e.g., Davis, 553
U. S. 328 ;
Camps Newfound, 520 U. S. 564 ;
Fulton Corp., 516 U. S. 325 ;
Bacchus Imports,
468 U. S. 263 ;
Central Greyhound, 334 U. S. 653 ;
Gwin, White, 305 U. S. 434 ;
J. D. Adams,
304 U. S. 307 . If the principal dissent were to prevail, all
of these cases would be thrown into doubt. After all, in those
cases, as here, the State’s decision to tax in a way that
allegedly discriminates against interstate commerce could be
justified by the argument that a State may tax its residents
without any Commerce Clause constraints.
E
While the principal dissent claims that we are
departing from principles that have been accepted for “a
century” and have been “repeatedly acknowledged by this
Court,” see
post, at 1, 2, 19, when it comes to
providing supporting authority for this assertion, it cites exactly
two Commerce Clause decisions that are supposedly inconsistent with
our decision today. One is a summary affirmance,
West Publishing
Co. v.
McColgan, 328 U. S. 823 (1946) , and neither
actually supports the principal dissent’s argument.
In the first of these cases,
Shaffer v.
Carter, 252 U. S. 37 , a resident of Illinois who
earned income from oil in Oklahoma unsuccessfully argued that his
Oklahoma income tax assessment violated several provisions of the
Federal Constitution. His main argument was based on due process,
but he also raised a dormant Commerce Clause challenge. Although
the principal dissent relies on
Shaffer for the proposition
that a State may tax the income of its residents wherever earned,
Shaffer did not reject the Commerce Clause challenge on that
basis.
The dormant Commerce Clause challenge in
Shaffer was nothing like the Wynnes’ challenge here.
The tax-payer in
Shaffer argued that “[i]f the tax is
considered an excise tax on business, rather than an income tax
proper,” it unconstitutionally burdened interstate commerce.
Brief for Appellant, O. T. 1919, No. 531, p. 166. The
taxpayer did not argue that this burden occurred because he was
subject to double taxation; instead, he argued that the tax was an
impermissible direct “tax on interstate business.”
Ibid. That argument was based on the notion that States may
not impose a tax “directly” on interstate commerce. See
supra, at 8–9. After assuming that the
taxpayer’s business was engaged in interstate commerce, we
held that “it is sufficient to say that the tax is imposed
not upon the gross receipts, but only upon the net proceeds,
and is plainly sustainable, even if it includes net gains from
interstate commerce. [
United States Glue Co. v.
Town of
Oak Creek], 247 U. S. 321 .”
Shaffer,
supra, at 57 (citation omitted).
Shaffer thus did not adjudicate anything
like the double taxation argument that was accepted in later cases
and is before us today. And the principal dissent’s
suggestion that
Shaffer allows States to levy discriminatory
net income taxes is refuted by a case decided that same day. In
Travis, a Connecticut corporation challenged New
York’s net income tax, which allowed residents, but not
nonresidents, certain tax exemptions. The Court first rejected the
taxpayer’s due process argument as “settled by our
decision in
Shaffer.” 252 U. S., at 75. But that
due process inquiry was not the end of the matter: the Court then
separately considered—and sustained—the argument that
the net income tax’s disparate treatment of residents and
nonresidents violated the Privileges and Immunities Clause.
Id., at 79–80.
The second case on which the principal dissent
relies,
West Publishing, is a summary affirmance and thus
has “considerably less precedential value than an opinion on
the merits.”
Illinois Bd. of Elections v.
Socialist
Workers Party, 440 U. S. 173 –181 (1979). A summary
affirmance “ ‘is not to be read as a renunciation
by this Court of doctrines previously announced in our opinions
after full argument.’ ”
Mandel v.
Bradley, 432 U. S. 173, 176 (1977) (
per curiam)
(quoting
Fusari v.
Steinberg, 419 U. S. 379, 392
(1975) (Burger, C. J., concurring)). The principal
dissent’s reliance on the state-court decision below in that
case is particularly inappropriate because “a summary
affirmance is an affirmance of the judgment only,” and
“the rationale of the affirmance may not be gleaned solely
from the opinion below.” 432 U. S., at 176
.
Moreover, we do not disagree with the result of
West Publishing. The tax in that case was levied only on
“ ‘the net income of every corporation derived
from sources within this State,’ ” and thus
was an internally consistent and nondiscriminatory tax scheme. See
West Publishing Co. v.
McColgan, 27 Cal. 2d 705, 707,
n., 166 P. 2d 861, 862, n. (1946) (emphasis added). Moreover,
even if we did disagree with the result, the citation in our
summary affirmance to
United States Glue Co. suggests that
our decision was based on the since-discarded distinction between
net income and gross receipts taxes.
West Publishing did
not—indeed, it could not—repudiate the double taxation
cases upon which we rely.
The principal dissent also finds it significant
that, when States first enacted modern income taxes in the early
1900’s, some States had tax schemes similar to
Maryland’s. This practice, however, was by no means
universal. A great many States—such as Alabama, Colorado,
Georgia, Kentucky, and Maryland—had early income tax schemes
that allowed their residents a credit against taxes paid to other
States. See Ala. Code, Tit. 51, ch. 17, §390 (1940); Colo.
Stat. Ann., ch. 84A, §38 (Cum. Supp. 1951); Ga. Code Ann.
§92–3111 (1974); Carroll’s Ky. Stat. Ann., ch.
108, Art. XX, §4281b–15 (Baldwin rev. 1936); Md. Ann.
Code, Art. 81, ch. 277, §231 (1939). Other States also adopted
internally consistent tax schemes. For example, Massachusetts and
Utah taxed only the income of residents, not nonresidents. See
Mass. Gen. Laws, ch. 62 (1932); Utah Rev. Stat.
§80–14–1
et seq. (1933).
In any event, it is hardly surprising that these
early state ventures into the taxation of income included some
protectionist regimes that favored the local economy over
interstate commerce. What is much more significant is that over the
next century, as our Commerce Clause juris-prudence developed, the
States have almost entirely abandoned that approach, perhaps in
recognition of their doubtful constitutionality. Today, the
near-universal state practice is to provide credits against
personal income taxes for such taxes paid to other States. See 2 J.
Hellerstein & W. Hellerstein, State Taxation, ¶20.10,
pp. 20–163 to 20–164 (3d ed. 2003).[
4]
F
1
As previously noted, the tax schemes held to
be unconstitutional in
J. D. Adams,
Gwin, White,
and
Central Greyhound, had the potential to result in the
discriminatory double taxation of income earned out of state and
created a powerful incentive to engage in intrastate rather than
interstate economic activity. Although we did not use the term in
those cases, we held that those schemes could be cured by taxes
that satisfy what we have subsequently labeled the “internal
consistency” test. See
Jefferson Lines, 514
U. S., at 185 (citing
Gwin, White as a case requiring
internal consistency); see also 1 Trost §2:19, at
122–123, and n. 160 (explaining that the internal
consistency test has its origins in
Western Live Stock,
J. D. Adams, and
Gwin, White). This test, which
helps courts identify tax schemes that discriminate against
interstate commerce, “looks to the structure of the tax at
issue to see whether its identical application by every State in
the Union would place interstate commerce at a disadvantage as
compared with commerce intrastate.” 514 U. S., at
185
. See also,
e.g., Tyler Pipe, 483 U. S., at
246–248;
Armco, 467 U. S., at 644–645;
Container Corp. of America v.
Franchise Tax Bd., 463
U. S. 159, 169 (1983) .
By hypothetically assuming that every State has
the same tax structure, the internal consistency test allows courts
to isolate the effect of a defendant State’s tax scheme. This
is a virtue of the test because it allows courts to distinguish
between (1) tax schemes that inherently discriminate against
interstate commerce without regard to the tax policies of other
States, and (2) tax schemes that create disparate incentives
to engage in interstate commerce (and sometimes result in double
taxation) only as a result of the interaction of two different but
nondiscriminatory and internally consistent schemes. See
Armco,
supra, at 645–646;
Moorman, 437
U. S., at 277, n. 12; Brief for Tax Economists as
Amici Curiae 23–24 (hereinafter Brief for Tax
Economists); Brief for Michael S. Knoll & Ruth Mason as
Amici Curiae 18–23 (hereinafter Brief for Knoll &
Mason). The first category of taxes is typically unconstitutional;
the second is not.[
5] See
Armco,
supra, at 644–646;
Moorman,
supra, at 277, and n. 12. Tax schemes that fail the
internal consistency test will fall into the first category, not
the second: “[A]ny cross-border tax disadvantage that remains
after application of the [test] cannot be due to tax
disparities”[
6] but is
instead attributable to the taxing State’s discriminatory
policies alone.
Neither petitioner nor the principal dissent
questions the economic bona fides of the internal consistency test.
And despite its professed adherence to precedent, the principal
dissent ignores the numerous cases in which we have applied the
internal consistency test in the past. The internal consistency
test was formally introduced more than three decades ago, see
Container Corp.,
supra, and it has been invoked in no
fewer than seven cases, invalidating the tax in three of those
cases. See
American Trucking Assns., Inc. v.
Michigan
Pub. Serv. Comm’n, 545 U. S. 429 (2005) ;[
7]
Jefferson Lines, Inc., 514
U. S. 175 ;
Goldberg, 488 U. S. 252;
American
Trucking Assns., Inc. v.
Scheiner, 483 U. S. 266
(1987) ;
Tyler Pipe, 483 U. S. 232 ;
Armco, 467
U. S. 638 ;
Container Corp.,
supra.
2
Maryland’s income tax scheme fails the
internal consistency test.[
8] A
simple example illustrates the point. Assume that every State
imposed the following taxes, which are similar to Maryland’s
“county” and “special nonresident” taxes:
(1) a 1.25% tax on income that residents earn in State, (2) a
1.25% tax on income that residents earn in other jurisdictions, and
(3) a 1.25% tax on income that nonresidents earn in State.
Assume further that two taxpayers, April and Bob, both live in
State A, but that April earns her income in State A whereas Bob
earns his income in State B. In this circumstance, Bob will pay
more income tax than April solely because he earns income
interstate. Specifically, April will have to pay a 1.25% tax only
once, to State A. But Bob will have to pay a 1.25% tax twice: once
to State A, where he resides, and once to State B, where he earns
the income.
Critically—and this dispels a central
argument made by petitioner and the principal dissent—the
Maryland scheme’s discriminatory treatment of interstate
commerce is not simply the result of its interaction with the
taxing schemes of other States. Instead, the internal consistency
test reveals what the undisputed economic analysis shows:
Maryland’s tax scheme is inherently discriminatory and
operates as a tariff. See Brief for Tax Economists 4, 9; Brief for
Knoll & Mason 2. This identity between Maryland’s tax and
a tariff is fatal because tariffs are “[t]he paradigmatic
example of a law discriminating against interstate commerce.”
West Lynn, 512 U. S., at 193. Indeed, when asked about
the foregoing analysis made by
amici Tax Economists and
Knoll & Mason, counsel for Maryland responded, “I
don’t dispute the mathematics. They lose me when they switch
from tariffs to income taxes.” Tr. of Oral Arg. 9. But
Maryland has offered no reason why our analysis should change
because we deal with an income tax rather than a formal tariff, and
we see none. After all, “tariffs against the products of
other States are so patently unconstitutional that our cases reveal
not a single attempt by any State to enact one. Instead, the cases
are filled with state laws that aspire to reap some of the benefits
of tariffs by other means.”
West Lynn,
supra,
at 193.
None of our dissenting colleagues dispute this
economic analysis. The principal dissent focuses instead on a
supposed “oddity” with our analysis: The principal
dissent can envision other tax schemes that result in double
taxation but do not violate the internal consistency test. This
would happen, the principal dissent points out, if State A taxed
only based on residence and State B taxed only based on source.
Post, at 17 (Ginsburg, J., dissenting); see also
post, at 7 (Scalia, J., dissenting). Our prior decisions
have already considered and rejected this precise
argument—and for good reason. For example, in
Armco,
we struck down an internally inconsistent tax that posed a risk of
double taxation even though we recognized that there might be other
permissible arrangements that would result in double taxation. Such
schemes would be constitutional, we explained, because “such
a result would not arise from impermissible discrimination against
interstate commerce.” 467 U. S., at 645. The principal
dissent’s protest that our distinction is “entirely
circular,”
post, at 17–18, n. 10,
misunderstands the critical distinction, recognized in cases like
Armco, between discriminatory tax schemes and double
taxation that results only from the interaction of two different
but nondiscriminatory tax schemes. See also
Moorman, 437
U. S., at 277, n. 12 (distinguishing “the potential
consequences of the use of different formulas by the two
States,” which is not prohibited by the Commerce Clause, from
discrimination that “inhere[s] in either State’s
formula,” which is prohibited).
Petitioner and the Solicitor General argue that
Maryland’s tax is neutral, not discriminatory, because the
same tax applies to all three categories of income. Specifically,
they point out that the same tax is levied on (1) residents
who earn income in State, (2) residents who earn income out of
State, and (3) nonresidents who earn income in State. But the
fact that the tax might have “ ‘the advantage of
appearing nondiscriminatory’ does not save it from
invalidation.”
Tyler Pipe, 483 U. S., at 248
(quoting
General Motors Corp. v.
Washington, 377
U. S. 436, 460 (1964) (Goldberg, J., dissenting)). See also
American Trucking Assns., Inc. v.
Scheiner, 483
U. S. at, 281 (dormant Commerce Clause applies to state taxes
even when they “do not allocate tax burdens between insiders
and outsiders in a manner that is facially discriminatory”);
Maine v.
Taylor, 477 U. S. 131, 138 (1986) (a
state law may discriminate against interstate commerce
“ ‘either on its face or in practical
effect’ ” (quoting
Hughes, 441 U. S.,
at 336)). In this case, the internal consistency test and economic
analysis—indeed, petitioner’s own
concession—confirm that the tax scheme operates as a tariff
and discriminates against interstate commerce, and so the scheme is
invalid.
Petitioner and the principal dissent,
post, at 6, also note that by offering residents who earn
income in interstate commerce a credit against the
“state” portion of the income tax, Maryland actually
receives less tax revenue from residents who earn income from
interstate commerce rather than intrastate commerce. This argument
is a red herring. The critical point is that the total tax burden
on interstate commerce is higher, not that Maryland may receive
more or less tax revenue from a particular tax-payer. See
Armco,
supra, at 642–645. Maryland’s tax
un-constitutionally discriminates against interstate commerce, and
it is thus invalid regardless of how much a particular taxpayer
must pay to the taxing State.
Once again, a simple hypothetical illustrates
the point. Assume that State A imposes a 5% tax on the income that
its residents earn in-state but a 10% tax on income they earn in
other jurisdictions. Assume also that State A happens to grant a
credit against income taxes paid to other States. Such a scheme
discriminates against interstate commerce because it taxes income
earned interstate at a higher rate than income earned intrastate.
This is so despite the fact that, in certain circumstances, a
resident of State A who earns income interstate may pay less tax to
State A than a neighbor who earns income intrastate. For example,
if Bob lives in State A but earns his income in State B, which has
a 6% income tax rate, Bob would pay a total tax of 10% on his
income, though 6% would go to State B and (because of the credit)
only 4% would go to State A. Bob would thus pay less to State A
than his neighbor, April, who lives in State A and earns all of her
income there, because April would pay a 5% tax to State A. But
Bob’s tax burden to State A is irrelevant; his total tax
burden is what matters.
The principal dissent is left with two arguments
against the internal consistency test. These arguments are
inconsistent with each other and with our precedents.
First, the principal dissent claims that the
analysis outlined above requires a State taxing based on residence
to “recede” to a State taxing based on source.
Post, at 1–2. We establish no such rule of priority.
To be sure, Maryland could remedy the infirmity in its tax scheme
by offering, as most States do, a credit against income taxes paid
to other States. See
Tyler Pipe,
supra, at
245–246, and n. 13. If it did, Maryland’s tax
scheme would survive the internal consistency test and would not be
inherently discriminatory. Tweak our first hypothetical,
supra, at 21–22, and assume that all States impose a
1.25% tax on all three categories of income but also allow a credit
against income taxes that residents pay to other jurisdictions. In
that circumstance, April (who lives and works in State A) and Bob
(who lives in State A but works in State B) would pay the same tax.
Specifically, April would pay a 1.25% tax only once (to State A),
and Bob would pay a 1.25% tax only once (to State B, because State
A would give him a credit against the tax he paid to State B).
But while Maryland could cure the problem with
its current system by granting a credit for taxes paid to other
States, we do not foreclose the possibility that it could comply
with the Commerce Clause in some other way. See Brief for Tax
Economists 32; Brief for Knoll & Mason 28–30. Of course,
we do not decide the constitutionality of a hypothetical tax scheme
that Maryland might adopt because such a scheme is not before us.
That Maryland’s existing tax unconstitutionally discriminates
against interstate commerce is enough to decide this case.
Second, the principal dissent finds a
“deep flaw” with the possibility that “Maryland
could eliminate the inconsistency [with its tax scheme] by
terminating the special nonresident tax—a measure that would
not help the Wynnes at all.”
Post, at 16. This second
objection refutes the first. By positing that Maryland could remedy
the unconstitutionality of its tax scheme by eliminating the
special nonresident tax, the principal dissent accepts that
Maryland’s desire to tax based on residence need not
“recede” to another State’s desire to tax based
on source.
Moreover, the principal dissent’s supposed
flaw is simply a truism about every case under the dormant Commerce
Clause (not to mention the Equal Protection Clause): Whenever
government impermissibly treats like cases differently, it can cure
the violation by either “leveling up” or
“leveling down.” Whenever a State impermissibly taxes
interstate commerce at a higher rate than intrastate commerce, that
infirmity could be cured by lowering the higher rate, raising the
lower rate, or a combination of the two. For this reason, we have
concluded that “a State found to have imposed an
impermissibly discriminatory tax retains flexibility in responding
to this determination.”
McKesson Corp. v.
Division
of Alcoholic Beverages and Tobacco, Fla. Dept. of Business
Regulation, 496 U. S. 18 –40 (1990). See also
Associated Industries of Mo. v.
Lohman, 511
U. S. 641, 656 (1994) ;
Fulton Corp., 516 U. S.,
at 346–347. If every claim that suffers from this
“flaw” cannot succeed, no dormant Commerce Clause or
equal protection claim could ever succeed.
G
Justice Scalia would uphold the
constitutionality of the Maryland tax scheme because the dormant
Commerce Clause, in his words, is “a judicial fraud.”
Post, at 2. That was not the view of the Court in
Gibbons v.
Ogden, 9 Wheat, at 209, where Chief
Justice Marshall wrote that there was “great force” in
the argument that the Commerce Clause by itself limits the power of
the States to enact laws regulating interstate commerce. Since that
time, this supposedly fraudulent doctrine has been applied in
dozens of our opinions, joined by dozens of Justices. Perhaps for
this reason, petitioner in this case, while challenging the
interpretation and application of that doctrine by the court below,
did not ask us to reconsider the doctrine’s validity.
Justice Scalia does not dispute the fact that
State tariffs were among the principal problems that led to the
adoption of the Constitution. See
post, at 3. Nor does he
dispute the fact that the Maryland tax scheme is tantamount to a
tariff on work done out of State. He argues, however, that the
Constitution addresses the problem of state tariffs by prohibiting
States from imposing “ ‘Imposts or Duties on
Imports or Exports.’ ”
Ibid. (quoting Art.
I, §10, cl. 2). But he does not explain why, under his
interpretation of the Constitution, the Import-Export Clause would
not lead to the same result that we reach under the dormant
Commerce Clause. Our cases have noted the close relationship
between the two provisions. See,
e.g., State Tonnage Tax
Cases, 12 Wall. 204, 214 (1871).
Justice Thomas also refuses to accept the
dormant Commerce Clause doctrine, and he suggests that the
Constitution was ratified on the understanding that it would not
prevent a State from doing what Maryland has done here. He notes
that some States imposed income taxes at the time of the adoption
of the Constitution, and he observes that “[t]here is no
indication that those early state income tax schemes provided
credits for income taxes paid elsewhere.”
Post, at 2
(dissenting opinion). “It seems highly implausible,” he
writes, “that those who ratified the Commerce Clause
understood it to conflict with the income tax laws of their States
and nonetheless adopted it without a word of concern.”
Ibid. This argument is plainly unsound.
First, because of the difficulty of interstate
travel, the number of individuals who earned income out of State in
1787 was surely very small. (We are unaware of records showing, for
example, that it was common in 1787 for workers to commute to
Manhattan from New Jersey by rowboat or from Connecticut by
stagecoach.)
Second, Justice Thomas has not shown that the
small number of individuals who earned income out of State were
taxed twice on that income. A number of Founding-era income tax
schemes appear to have taxed only the income of residents, not
nonresidents. For example, in his report to Congress on direct
taxes, Oliver Wolcott, Jr., Secretary of Treasury, describes
Delaware’s income tax as being imposed only on “the
inhabitants of this State,” and he makes no mention of the
taxation of nonresidents’ income. Report to 4th Cong., 2d
Sess. (1796), concerning Direct Taxes, in 1 American State Papers,
Finance 429 (1832). Justice Thomas likewise understands that the
Massachusetts and Delaware income taxes were imposed only on
residents.
Post, at 2, n. These tax schemes, of course, pass
the internal consistency test. Moreover, the difficulty of
administering an income tax on nonresidents would have diminished
the likelihood of double taxation. See R. Blakey, State Income
Taxation 1 (1930).
Third, even if some persons were taxed twice, it
is unlikely that this was a matter of such common knowledge that it
must have been known by the delegates to the State ratifying
conventions who voted to adopt theConstitution.
* * *
For these reasons, the judgment of the Court
of Appeals of Maryland is affirmed.
It is so ordered.