Skip to comments.SCOTUS to decide on double taxation across state lines [Commerce]
Posted on 06/01/2014 6:39:57 AM PDT by SeekAndFind
A rather wonky interstate commerce case has been granted a writ of certiorari and will be heard by the Supreme Court during the fall session. The reason this particular petition should interest you is that it has the potential to affect so many people, specifically those who derive income from any sources outside the state where they live. As explained in this Forbes article, the fundamental question being put to the court is as follows:
Does the United States Constitution prohibit a state from taxing all the income of its residents wherever earned by mandating a credit for taxes paid on income earned in other states?
The specifics of the original case:
In this case, a married couple, the Wynnes, reported taxable net income of approximately $2.7 million. More than half of that amount represented a share of earnings in an S corporation with operations in several states. The Wynnes claimed a credit on their Maryland tax returns for taxes paid to 39 other states but not for any county or local government taxes. The State of Maryland denied the credits and issued a notice of deficiency and the Wynnes appealed. At a hearing, the assessment was affirmed.
So the Wynnes lost the first two rounds in court, even though they were apparently taxed by the states where the income was generated and then taxed again in Maryland But they then amended their original request, asking the courts to answer the question, “whether a state had the unconditional right to tax all income based on residency.”
When they phrased it that way, the Circuit Court agreed with the Wynnes. The state appealed and the Court of Appeals sides with the Wynnes as well, since they were being subjected to double taxation. Not suprisingly, the Obama administration has weighed in with an amicus curiae brief supporting the state, though their argument mainly seems to be, Hey! This could cut out a lot of tax money!
The feds argued in their brief that though States often choose to grant tax credits to their residents for income taxes paid in other States, nothing in the Commerce Clause compels a State to offer such credits or otherwise defer to other States in the taxation of its own residents income. Further, [t]he decision may lead to challenges to similar tax schemes in other jurisdictions; and is inconsistent with statements made by the highest courts in other States.
Don’t expect a quick answer here, since we’ll be lucky to have a decision by Christmas. But as wonky as it may sound, you should probably keep an eye on this one. It doesn’t only affect wealthy investors. If you commute across state lines for work and don’t receive a full credit for taxes paid in the state where you work, this could directly impact your bottom line too.
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RE: And if possible, make damn sure that your official state of residence has no state income tax at all.
That limits you to just 7 out of 50 states.
Even though only seven states have no income taxes, there are a few other states with income tax rates that are very low and reasonable. Tennessee and New Hampshire, for example, only assess income taxes on interest and dividend income.
I wonder if that would apply to U.S. citizens who live and work in another country - and damn well pay income taxes back to the U.S. - or get fined up the wazoo. Double taxation again.
I just don’t see how that is legal.
Ping for later.
RE: I wonder if that would apply to U.S. citizens who live and work in another country - and damn well pay income taxes back to the U.S. - or get fined up the wazoo.
That would and SHOULD be the next challenge IF this one is decided rightly.
America (the so called land of the free ), is one of only two countries ( the other being Eritrea ) that taxes income of citizens and permanent residents earned OUTSIDE the United States.
A U.S. citizen who is taxed in another country is not taxed twice on the same income. The U.S. has treaties with many countries which specify which country can tax which kind of income. When there is no applicable treaty, the U.S. Internal Revenue Code allows the U.S. taxpayer a credit for foreign taxes paid.
Having said all that, the IRS takes the position that these credits are a matter of "legislative grace," meaning that (in their view) nothing in the Constitution requires Congress to allow such a credit.
However, NH’s property tax rate more than makes up the difference. Property taxes don’t care what your personal income is whereas taxed income often has some relief in the form of deductions or exemptions.
You don’t have to own a home in a state to use it as your official residence. Heck, just look at how many members of Congress get away with renting an unfinished basement in a friend’s home back in their home district and using that as their “residence” even as they own and maintain a residence in D.C. or northern Virginia.
Another option is to have the S Corporation own the home in a state like New Hampshire. The taxpayers can then pay a nominal rent to the S Corp. for their own home. This allows them to take more deductions on the home (depreciation and repairs, for example) than they would be able to take as individual taxpayers.
However, this isn't necessarily a "legislative grace" in every case. Many of these arrangements are subject to treaties that the U.S. signs with foreign countries, and this might be one of the rare cases where a U.S. citizen can rely on the terms of a treaty with a foreign nation to protect himself from a predatory Federal government.
Try this on for size all you faculty lounge freaks. Will all the states be able to tax the incomes of, lets say aircrews earn while in flight over their state, or train crews while choo chooing by> How about those nasty 18 wheelers rolling along the interstates? Was tried before. Bombed out big time.
I am at a loss here... All the states involved offer tax breaks for taxes paid in other states. The issue is the state collection of local and county taxes which do not offer those credits. Can SCOTUS mandate local tax law?
I’m thinking that where the SCOTUS will walk is a very fine line and rule that when states collect for local jurisdictions, there must be uniformity across the state and local taxes. Unreasonably complicated differences are an undue burden, and collection of those taxes must be performed by the local tax body.
No state has a right to tax the income of a non-resident. Even if they pass laws allowing it.
When I authorized my daughter who lives in another state to charge my credit card to purchase a laptop computer to replace the one stolen during a burglary, the Socialist State of New York took New York sales tax on the transaction, even though the computer was made and sold in another state, purchased by a resident of that other state and has never been brought to New York. It’s simply because it was charged to My Credit Card and I am a resident of a state who would take the coins from the eyes of a corpse.
Another reason to live in Texas ;-)
Does this also affect ALL professional athletes????
They do a game in states everywhere, and are all those states demanding income based upon a percentage of their overall contract income & the appearance of such athlete in their state???
How about a person who’s company sends them all across the country to trouble-shoot problems with equipment or software????
How about people like Bill Clinton who speaks for money all across the country? Does HE get double-taxes???
Are you saying that every person who has a credit card in New York state is charged sales tax on all of their purchases——even if such purchases are made while you are on a trip in another state???