In a rare victory for taxpayers, the Supreme Court ruled affirmed on Monday that states cannot doubly tax income earned in other states. From the Washington Post:

The court voted 5 to 4 to affirm a 2013 Maryland Court of Appeals ruling that the state’s practice of withholding a credit on the county segment of the state income tax wrongly exposes some residents with out-of-state income to double taxation. Justices said the provision violated the Constitution’s commerce clause because it might discourage individuals from doing business across state lines.

The issue of when a state can impose a tax on an individual has historically been a complicated one considering how transient people are. We often travel through, work at, and establish residency in different states. Especially in major cities on state borders like Washington, DC or New York, New York, an individual may work in one city and live in another.

As such, the Supreme Court established a four-pronged test in the 1977 case Complete Auto Transit, Inc v. Brady to determine when a state can levy a tax. Namely, a tax can survive a Commerce Clause challenge if it “[1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State.”

Maryland’s tax violated 2 and 3. By failing to offer a full credit for taxes paid in other states, Maryland’s income tax effectively acted as a tariff, discouraging residents from making money in and thereby doing business with other states. This is a major victory against double taxation and comes at a particularly important time.

With the growth of the internet and America’s continually shifting economy toward the service sector, states keep looking for ways to impose taxes on people making money outside of their borders. It’s a welcome sign that the Supreme Court will not put up with such schemes — at least so far.

The Supreme Court protects taxpayers for once
Casey Given About the author:
Casey Given is executive Director of Young Voices. Follow him on Twitter @caseyjgiven
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