Menu
Tax Notes logo

The States’ Response to Wynne Seven Years Later

Posted on Apr. 25, 2022
Kathleen K. Wright
Kathleen K. Wright

Kathleen K. Wright is the director of the state and local tax program in the School of Taxation at Golden Gate University, San Francisco. She frequently presents seminars on SALT issues for the California CPA Education Foundation.

In this installment of States of Mind, Wright reviews the lack of state response to the holding in Wynne, noting that few states have taken steps to modify their credit for taxes paid to other states and thus operate in a way arguably inconsistent with that opinion.

It was approximately seven years ago that the U.S. Supreme Court issued its opinion in Wynne,1 a case that held that several of the restrictions imposed by the states on use of the credit for taxes paid to other states were discriminatory under the commerce clause and therefore were unconstitutional. The holding of the case significantly broadened the scope of the credit by allowing local taxes and gross receipts taxes to qualify for the credit. This article looks at the law in all the states that have an income tax to determine what, if any, impact the Wynne decision has had seven years later.

A decision of the U.S. Supreme Court is binding on state courts when it comes to constitutional interpretation. Therefore, it is somewhat surprising that so few states have taken steps to modify their other state tax credit (OSTC) and adopt the holding in Wynne. Unfortunately, the Supreme Court has no power to enforce its decisions. It cannot compel a state legislature or agency to obey. The Court relies on the executive and legislative branches to carry out its rulings, which, in the case of the OSTC, they have not done.

Wynne

In Wynne, the U.S. Supreme Court affirmed a Maryland Court of Appeals decision holding that the failure of the state’s personal income tax law to allow a credit against the county income tax for taxes paid to other states unconstitutionally discriminated against interstate commerce.

The Wynnes were Maryland residents who earned passthrough income from a subchapter S corporation that did business in 39 states. They paid individual income taxes to those other states based on their share of the S corporation’s income sourced to each state. The Wynnes also paid individual income tax as Maryland residents.

Maryland’s tax on residents was composed of a state income tax and a county income tax. The Wynnes claimed the credit for tax paid to other states against the total Maryland tax, including both the state and the county portions. On audit, the credit was disallowed against the county portion. If a resident paid tax on income sourced to another jurisdiction, he could take a credit for taxes paid against the state income tax — but not the county tax. The Wynnes challenged the comptroller’s findings and the case eventually went to the U.S. Supreme Court.

The Supreme Court noted that the effect of the law was that some income earned by Maryland residents outside the state was taxed twice, and that the scheme created an incentive for taxpayers to opt for intrastate rather than interstate economic activity. The internal consistency test confirmed that the tax scheme operated as a tariff and discriminated against interstate commerce.

The Supreme Court held that a state cannot impose a tax that discriminates against interstate commerce either by providing a direct commercial advantage to local businesses or by subjecting interstate commerce to the burden of multiple taxation. Although prior cases involved taxes on gross receipts (rather than net income) and assessments on corporations (rather than individuals), the Court did not see any reason why the dormant commerce clause should treat individuals less favorably than corporations.

Addressing the assertion that the commerce clause imposed no limit on Maryland’s ability to tax the income of its residents wherever that income was earned, the Supreme Court stated that this argument confused what a state may do under the due process clause with what it may do under the commerce clause. Maryland’s jurisdictional power to tax its residents’ out-of-state income did not insulate its tax scheme from dormant commerce clause scrutiny.

Under the commerce clause analysis, the state may not discriminate against interstate commerce by imposing a discriminatory double tax on income earned out of state, which results in an incentive to engage in intrastate commerce rather than interstate commerce. In Wynne this was the result if no credit was allowed against the county portion of the Maryland tax. Maryland could cure this result if it provided for a credit for tax paid to other states against the county portion of the tax. In addition to allowing a credit against the local tax payment, Wynne provides guidance to the states on how to handle gross receipts taxes. The Court states that it sees no reason why the distinction between gross receipts and net income (as the base for a tax) should matter — since it is considering the assessment’s practical effect. The Court cites several cases that rejected this formal distinction some time ago. The Court then states that the gross receipts judicial pendulum has swung its 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.

So what is the impact of Wynne on the credit for taxes paid to other states now approximately seven years after the decision? The table at the end of this article sets forth the answer to these questions on a state-by-state basis.

  1. Does the state allow a credit for local taxes paid to another state?

  2. Does the state allow a credit for gross receipts taxes in addition to net income taxes?

The results of this review are that relatively few states answer either of these two questions affirmatively — in other words, Wynne has been largely ignored by many states.

Credit Allowed for Local Taxes

A total of 12 states allow some type of local tax to qualify for the credit. Illinois, Iowa, Kansas, Maryland, and North Dakota allow a credit for taxes paid to other states for taxes that are paid to municipalities and local government. Seven states allow a credit for tax paid to a political subdivision of a state. Political subdivision is generally defined to include any state or local governmental entity including any state agency, board, commission, state-supported institution of higher education, city, county, township, or municipal corporation, and any other body that is responsible for government activities in a geographical area smaller than that of the state — a broad definition. These states are Connecticut, Maine, Michigan, Missouri, Nebraska, New Jersey, and New York.

Credit Allowed for Gross Receipts Taxes

Colorado, Kansas, Pennsylvania, Missouri (limited), and Wisconsin (limited) allow a credit for taxes paid to another state. Missouri and Wisconsin are included only because they allow a credit for the Texas margin tax, which many states do not allow and consider the tax a tax on gross receipts.

Wynne has not proven to be the game-changer that it was thought to be back in 2015. So far, litigation has not addressed the most glaring issue of whether local tax payments qualify for the state’s credit; however, Wynne-related issues have come up indirectly in a handful of cases such as Zilka.2 In this case, the question involved whether the credit should be applied to the entire state and local tax assessed on the taxpayer, or whether the state tax and the local tax should be analyzed as separate and independent taxes. Analyzing these taxes separately can limit the amount of credit that is allowed to the taxpayer.

Zilka v. Tax Review Board City of Philadelphia

In Zilka, the taxpayer was a resident of Philadelphia, but worked full time in Wilmington, Delaware. The taxpayer’s Delaware employer withheld the Philadelphia wage tax, Wilmington earned income tax (Wilmington tax), Pennsylvania income tax (Pennsylvania tax), and Delaware income tax (Delaware tax). The taxpayer claimed a credit for the Delaware tax (5 percent) to offset the Pennsylvania tax (3.07 percent) on her Pennsylvania personal income tax return; Pennsylvania allowed a full credit. The taxpayer also claimed a credit for the Wilmington tax (1.25 percent) and the balance of the Delaware tax (5 percent - 3.07 percent = 1.93 percent) to offset the Philadelphia wage tax (3.92 percent). The Philadelphia Department of Revenue allowed a credit for the Wilmington tax against the Philadelphia wage tax but not for the remainder of the Delaware tax.

The taxpayer argued that the state’s position violates the commerce clause by placing an undue burden on interstate commerce. The basis of this argument is that she ends up paying 1.93 percent (5 percent - 3.07 percent) higher than her intrastate counterpart. She believed that she should be able to claim the excess Delaware tax against the Philadelphia wage tax. She argued that the tax is not fairly apportioned because it fails to provide relief from double taxation and does not meet the test for internal and external consistency.

The commonwealth court did not see it that way and held that the wage tax did not tax the taxpayer’s income more heavily than that of other residents of Philadelphia. If the taxpayer chose to live in Philadelphia and work in Delaware she gets a credit for the tax paid to Wilmington against her Philadelphia tax. She also gets a credit for her Delaware tax payment against her Pennsylvania tax liability. The court said that the tax policy of Pennsylvania satisfies due process and commerce clause requirements because it awards the taxpayer a credit against the Pennsylvania tax and the wage tax, albeit these taxes are assessed at different rates. If the additional tax owed by the interstate taxpayer results from a higher tax rate assessed by one jurisdiction, this does not render the entire tax structure unconstitutional.

The court determined that Wynne was not violated by the facts of Zilka. Wynne held that the internal consistency test would not be violated if there was a credit for similar taxes paid by a resident taxpayer to other jurisdictions based on the income earned there. This is exactly what Pennsylvania and Philadelphia did — Philadelphia gave a full credit for the Wilmington tax and Pennsylvania provided a full credit for the Delaware tax. The court concluded that there was no support for the taxpayer’s position that the local and state taxes must be aggregated for commerce clause purposes. The court said that Philadelphia and Pennsylvania are two distinct taxing jurisdictions administering two distinct taxes to two different sets of citizenry.

Commentators in Tax Notes State have disagreed with the holding in this case3 and have argued that the entire state tax system should be evaluated as a whole under the commerce clause, so that a local tax could offset a state tax and vice versa. After all, this is exactly what happened in Wynnethe Court did not distinguish between state and county taxes for purposes of determining their eligibility for the Maryland credit. Using the Supreme Court’s approach, the taxpayer in Zilka would have won and been allowed to claim the excess Delaware tax against the Philadelphia wage tax.

Pennsylvania is not alone in instructing taxpayers to analyze each tax independently when applying the credit for taxes paid to other states. Indiana and California also take this approach.

Indiana Letter of Finding No.1-20160254

In Indiana Letter of Finding No. 1-20160254, which was issued February 1, 2017, the taxpayer was a Indiana resident who reported and paid state and county income taxes. He was also a shareholder in an S corporation that paid taxes in Georgia and Alabama. The taxpayer claimed a credit against his Indiana county tax for his share of the Georgia and Alabama state income taxes paid by the S corporation. The Indiana DOR disallowed the credit for the state income taxes against the Indiana county tax. The taxpayer claimed that this holding conflicted with Wynne.

Indiana distinguishes its tax system from that of Maryland because Indiana allows each county to choose whether to impose a county-level income tax and each county’s governing body must independently approve the tax and the rate. Indiana’s local-option income taxes are not part of a state-imposed income tax scheme as in Maryland. Further, Indiana allows a credit for taxes paid to other states against Indiana’s state income tax and a credit for out-of-state local income taxes against local taxes owed in Indiana. Indiana does not allow out-of-state local income taxes to offset state income taxes. Indiana maintains that this is consistent with Wynne, in that if Maryland had offered credit for out-of-state local income taxes, then the Maryland tax system would have survived the internal consistency test and would not have been found to be discriminatory.

California Legal Ruling 2017-01

The analysis of California’s credit takes a slightly different twist. Cal. Rev. and Tax. Code section 17041.5 expressly prohibits local income taxes. It states:

Notwithstanding any statute, ordinance, regulation, rule or decision to the contrary, no city, county, governmental subdivision, district, public and quasi-public corporation, municipal corporation, whether incorporated or not or whether chartered or not, shall levy or collect or cause to be levied or collected any tax upon the income, or any part thereof, of any person, resident or nonresident. This section shall not be construed so as to prohibit . . . any otherwise authorized license tax upon a business measured by or according to gross receipts.

Therefore, California does not have local income taxes, but is still left with the question of whether to allow a local income tax paid to another state to be claimed as a credit against the California income tax. The answer after Wynne should be yes, but unfortunately that is not the case. California’s response to Wynne is set forth in Legal Ruling 2017-01,4 which focuses on the treatment of multifaceted taxes paid in other states that consist of a conglomeration of different types of taxes. Like the holding in Zilka, Legal Ruling 2017-01 makes clear that each of the separate taxes is analyzed independently and not in the aggregate as a single tax.

California law allows an OSTC for net income taxes imposed by and paid to another state on income also taxed by California when that income is derived from sources in the other taxing state, and the other state does not allow California residents a credit against the taxes imposed by that state for taxes paid to California.5

Determining whether payment of a tax to another state is eligible for the OSTC for California purposes turns on:

  • whether the tax is properly characterized as a tax on, according to, or measured by income; and

  • if it is, whether the tax is properly characterized as a net income tax.

If the tax is not properly characterized as a tax on income, the inquiry ends and the taxpayer may claim a deduction if the tax base is gross receipts and assuming all other requirements are met.

If the tax is properly characterized as an income tax, then a further determination must be made regarding whether the tax is imposed on gross income or on net income. Legal Ruling 2017-01 distinguishes for tax purposes between a gross receipts tax (deductible), a gross income tax (not deductible and not creditable), and a net income tax (eligible for the OSTC).

Gross Receipts Tax

Under Legal Ruling 2017-01, a gross receipts tax is imposed on gross income without allowing a deduction for cost of goods sold (referred to as a return of capital). In Beamer,6 the California Supreme Court held that the Texas occupation tax paid by California taxpayers on oil royalties was a gross receipts tax and deductible. The taxpayers had entered oil and gas leases with a drilling company and received royalty income from Exxon Corp., the operator of the field. Texas imposes an occupation tax on oil and gas producers. The royalty owners are the producers for purposes of that tax and are liable for their share of the occupation tax on what is produced. The tax is computed based on the market value of the gas or oil when it is produced.

Gross Income Tax

Although Legal Ruling 2017-01 defines a gross income tax as a tax imposed on gross income only, with COGS (or a return of capital) deducted from the tax base, gross income also includes payments that the statute defines as gross income.

MCA Inc.7 involved foreign taxes withheld from record royalties paid to MCA, which deducted those payments under Cal. Rev. and Tax. Code section 24345 as a gross receipts tax. The California Court of Appeal held that those payments were not deductible under Rev. and Tax. Code section 24271 and the regulations. Those regulations distinguish between income from manufacturing, merchandising, and mining and income from rents and royalties.

In a manufacturing, merchandising, or mining business, gross income means the total sales less the COGS, plus any income from investments and from incidental or outside operations or sources.

Gross income includes rents received or accrued for the occupancy of real estate or the use of personal property. It also includes royalties. Royalties may be received from books, stories, plays, copyrights, trademarks, formulas, or patents — or from the exploitation of natural resources such as coal, gas, oil, copper, or timber.

Because it had no COGS, MCA argued that its gross income and gross receipts were the same. The court disagreed on the basis that the taxpayers in Beamer were oil producers that had a COGS. MCA did not have a COGS, but that did not make its gross rents and royalties gross receipts if the regulations defined those payments as gross income. Therefore, the court denied the deduction because the foreign taxes were assessed on royalties, which were defined by statute as gross income.

Net Income Tax

Legal Ruling 2017-01 defines a net income tax as a tax imposed on the income that remains after gross income is reduced by deductions, credits, or exemptions. Gray8 concerned whether Connecticut residents were entitled to a credit toward their California personal income tax for taxes they paid to Connecticut on California-source capital gains. The Connecticut statute imposed a tax on capital gains computed under federal law as the net gain on sale. Also, capital losses could offset capital gains and be carried over to offset capital gains in future years. The issue before the court boiled down to whether the tax on net capital gains was a gross income tax or a net income tax. The court differentiated the capital gains tax from the ordinary income tax. The tax was assessed on a category of income computed separately from the ordinary income tax. Under that formula, the capital gains tax was assessed on net capital gains after allowing for capital losses and other exemptions. That was enough to render it a net income tax eligible for credit against the California tax under Rev. and Tax. Code section 18002.

In its one reference to Wynne, the Franchise Tax Board acknowledged that state payments made to another state could qualify for the OSTC regardless of their label under the other state’s law (meaning that the county portion of the Maryland tax could qualify for the OSTC in California). However, the OSTC is unavailable for taxes imposed by or collected by political subdivisions of another state, such as counties, cities, or other localities even if they are collected by the state. So if the tax is imposed by a state statute and paid to the state, the tax is deemed a tax imposed by and paid to the state, even if the tax is labeled a county, city, or other local tax.

At least one commentator has argued that Legal Ruling 2017-01 is unconstitutional on the basis that the analysis should be of the state’s entire tax system, not its independent components.9 As discussed, under Legal Ruling 2017-01 each different type of tax paid to the other state must be analyzed independently. Under the separate and independent analysis, if the tax is assessed by a local government, it does not qualify for the OSTC and if its base is gross receipts it will also not qualify. This result has a discriminatory impact on interstate commerce and directly contradicts Wynne.

The holding in Wynne and the policies set forth in several states (including California) result in a discriminatory tax structure that violates the commerce clause. Unfortunately the U.S. Supreme Court’s inability to ensure enforcement allows its opinions to be ignored. It is therefore up to either the state legislative and executive branches or the state’s courts to change the law to bring it into compliance with the U.S. Constitution. And so we wait.

States That Allow Local Taxes and Gross Receipts Taxes to Be Claimed as an OSTC

State

Can Residents Claim a Credit for Local Taxes?

Can Residents Claim a Credit for Gross Receipts Taxes?

Notes

Alabama

No

No

Ala. Code section 40-18-21; Ala. Admin. Code r. 810-3-21-01(3)(a).

Arizona

No

No

Ariz. Rev. Stat. Ann. section 43-1071(A) and (D).

Arkansas

No

No

Ark. Code Ann. section 26-51-504.

California

No

No

Cal. Rev. & Tax. Code section 18001.

Net income taxes, as it applies to taxes paid to other states, has been held not to include privilege taxes on gross income.

Jesson, SBE, 57-SBE-011 (June 24, 1957).

The Texas margin tax is not a net income tax under California law because it is a tax on, or measured by, gross receipts. Therefore, payment of the Texas tax is deductible but not eligible for the credit.

Legal Ruling 2017-01 (Feb. 22, 2017).

Colorado

No

Yes

Colorado resident individuals, estates, and trusts may claim a credit for income taxes or gross receipts taxes paid to another state, the District of Columbia, or a territory or possession of the United States on income derived from sources in other taxing jurisdictions, regardless of the name each state may call the tax. The credit is not available for taxes paid to cities or to other countries.

Colo. Rev. Stat. section 39-22-108(1); Colo. Code Regs. section 39-22-108(2); Colorado FYI Tax Publication No. Income 17 (Dec. 2012).

Connecticut

Yes

No

Any resident or part-year resident is allowed a credit against Connecticut personal income tax equal to the amount of any income tax imposed by another jurisdiction on income derived from sources in the other jurisdiction and that is also subject to the Connecticut personal income tax.

Conn. Gen. Stat. section 12-704(a).

For these purposes, a qualifying jurisdiction includes another state, a political subdivision of another state, and the District of Columbia. There is no credit for federal taxes.

Conn. Gen. Stat. section 12-704(a); Conn. Agencies Regs. section 12-704(a)(4).

Delaware

No

No

Del. Code Ann. tit. 30, sections 1111(a) and 1637.

Georgia

No

No

Ga. Code Ann. section 48-7-28; Ga. Comp. R. & Regs. 560-7-7.01.

Hawaii

No

No

Haw. Rev. Stat. section 235-55(a); Haw. Code R. section 18-235-61-04.

Idaho

No

No

Idaho Code section 63-3029(1); Idaho Admin. Code section 35.01.700(01), 700(02), 701(01).

No credit for Texas margin tax. DOR Directive 08-7 (Dec. 18, 2008).

Illinois

Yes

No

Residents may claim a credit against Illinois personal income tax liability for taxes imposed upon or measured by income that are paid to another state or municipality, the District of Columbia, Puerto Rico, or any U.S. territory or possession.

35 Ill. Comp. Stat. 5/601(b)(3); Ill. Admin. Code tit. 86, section 100.2197; Illinois DOR, “Illinois Schedule CR for Individuals,” Publication 111 (Dec. 2009).

Indiana

Yes (see note)

No

Indiana allows a credit for out-of-state income taxes against Indiana’s state income tax and a credit for out-of-state local income taxes against local income taxes owed in Indiana.

Ind. Code section 6-3-3-3(a). Indiana Commissioner Directive No. 57 (July 1, 2016).

Iowa

Yes

No

Iowa Code section 422.8(1); Iowa Admin. Code r. 701-42.6(2)(a).

In response to Wynne, Iowa’s out-of-state tax credit calculated on Form IA 130 must be applied before other nonrefundable Iowa tax credits and before calculation of any school district surtax or EMS surtax. The prior method produced a result like the facts in Wynne and was changed so that credit would offset local tax.

Kansas

Yes

Yes

Kan. Stat. Ann. section 79-32.111(a); Kan. Admin. Regs. section 92-12-11.

A Kansas DOR notice provides that residents can claim a credit against the individual income tax liability for taxes paid to other states and also to local governments. The credit is allowed for both the income or earnings taxes imposed by the other state and local governments of the other state.

Kansas DOR Notice 15-15 (Aug. 10, 2015).

Kentucky

No

No

Ky. Rev. Stat. Ann. sections 141.019 and 141.070; Kentucky Technical Advice Memorandum 18.03 (Aug. 31, 2018).

Louisiana

No

No

La. Rev. Stat Ann. section 47.33(A); Louisiana DOR, Instructions, Form IT-540, Louisiana Resident Individual Income Tax Return.

Maine

Yes

No

Maine allows residents to claim a credit for taxes paid to another state, a political subdivision of any state, the District of Columbia, or any political subdivision of a foreign country that is analogous to a U.S. state (e.g., New Brunswick, Canada).

Me. Rev. Stat. Ann. tit. 36, section 5217-A; Maine Revenue Services, “Guidance Document: Credit for Income Taxes Paid to Other Jurisdictions” (Dec. 2020).

Maryland

Yes

No

Beginning with tax year 2015, a resident may claim a credit against state and local income tax (previously, against state income tax) for out-of-state income taxes paid to another state for the year.

Md. Code Ann., Tax-Gen. section 10-703(a) and (b). Maryland Administrative Release No. 42 (Mar. 1, 2019).

Massachusetts

No

No

Massachusetts DOR, “Guide to Personal Income Tax” (Oct. 16, 2019). Mass. Gen. Laws ch. 62, section 6(a); Massachusetts DOR, Directive No. 08-06 and 07 (Dec. 18, 2008).

Michigan

Yes

No

Michigan’s Income Tax Act (Mich. Comp. Laws Ann. section 206.255(1) and (2)), allows a resident “a credit against the tax otherwise due under this act for the amount of an income tax imposed on a resident by another state of the United States, or a political subdivision of another state of the United States, the District of Columbia, or a Canadian province, on income derived from sources without this state which is also subject to tax under this act.”

Minnesota

No

No

Minn. Stat. section 290.06 subd. 22. The DOR has determined that the Ohio commercial activity tax and the Texas business margin tax are not taxes based on net income.

Minnesota DOR, Revenue Notice No. 08-08 (July 21, 2008).

Mississippi

No

No

Miss. Code Ann section 27-7-77(1); Miss. Reg. 35.III.1.12.

Missouri

Yes

See note

Resident individuals are allowed a credit for income taxes imposed by another state, political subdivision, or the District of Columbia on income from sources taxable in the other jurisdiction and in Missouri.

Mo. Rev. Stat. sections 143.081(1), 143.081(2).

Missouri allows a credit for taxes paid for the Tennessee excise tax (Herschend v. Director of Revenue, 896 S.W.2d 458 (Mo. 1995));and the Texas margin tax (Private Letter Ruling No. LR 7030, Feb. 3, 2012).

Missouri does not allow the credit for the Washington B&O tax.

Montana

No

No

Mont. Code Ann. section 15-30-2302.

Nebraska

Yes

No

A resident individual, including partners and beneficiaries of estates or trusts, and a resident estate or trust, are allowed a credit against the Nebraska income tax for any income tax imposed by and paid to another state or political subdivision thereof or the District of Columbia.

Neb. Rev. Stat. section 77-2730(1) and (2). Neb. Admin. R & Regs section 22-011-.01.

New Jersey

Yes

No

Resident taxpayers are allowed a credit against the gross income tax otherwise due for any income or wage tax imposed for that same tax year by another U.S. state, political subdivision, or the District of Columbia regarding some income that is also subject to the gross income tax.

N.J. Rev. Stat. section 54A-4-1(a); N.J. Admin. Code section 18-35-4.1(a)(1)(i).

New Mexico

No

No

N.M. Stat. Ann. section 7-2-13.

New York

Yes

No

A credit is allowed to residents for income taxes paid to other states or their political subdivisions, the District of Columbia or a province of Canada on income that is derived from the foreign state or province and is subject to New York taxation.

N. Y. Tax Law section 620(a).

The Tennessee excise tax, the Philadelphia business profits tax, and the District of Columbia unincorporated business tax are examples of taxes that are considered income taxes for purposes of the credit.

N.Y. Tax Law section 612(b)(3).

North Carolina

No

No

N.C. Gen. Stat. section 105-153.9; 17 N.C. Admin. Code 06B.0607(a).

North Dakota

Yes

No

N.D. Cent. Code section 57-38-30.3(4).

The state Tax Commissioner’s Office has said that, as a result of Wynne, the state’s credit is expanded to include income tax paid to a local jurisdiction in another state.

Income Tax Newsletter (Jan. 2016).

Ohio

No

No

Ohio Rev. Code Ann. section 5747.05.

Oklahoma

No

No

Okla. Stat. tit. 68, section 2357(B)(1); Okla. Admin. Code section 710.50-15-72.

Oregon

No

No

Or. Admin. R. 150-316-0082(1).

An eligible tax is measured by income only if the basis of the tax includes revenue from sales and from services rendered, and income from investments. The law imposing the tax must permit a deduction for COGS and the cost of services rendered. This appears to eliminate the Texas margin tax.

Or. Rev. Stat. section 316.082(7).

Pennsylvania

No

Yes

Residents get a credit for gross or net income taxes paid to other states.

Pa. Stat. Ann. 72 section 7314; Pa. Code 61 sections 111.3 and 111.4.

The resident credit for taxes paid to other states is not allowed for any taxes paid to a city, town, municipality, or other political subdivision of Pennsylvania or another state or country.

Pa. Stat. Ann. 72 section 7314(a).

Rhode Island

No

No

R.I. Gen. Laws section 44-30-18(a); 280 R.I. Code R. section 280-RICR-20-55-3.

New York City earnings taxes paid by Rhode Island residents could not be credited against the residents’ Rhode Island income tax because the statutes allow a credit only for income taxes imposed by states, not by cities.

Rhode Island Division of Taxation, Administrative Hearing Decision No. 97-05 (Jan. 9, 1997).

South Carolina

No

No

S.C. Code Ann. section 12-6-3400(A)(1).

Tennessee

No

No

The only credit for taxes paid applies to a resident individual who is a shareholder of an S corporation that is incorporated and doing business in another state. The resident shareholder may deduct from the tax otherwise due the tax paid to the other state as a result of such income, distributions, or dividends if a tax credit reciprocity agreement exists between Tennessee and the other state.

Tenn. Code. Ann. section 67-2-122.

Utah

No

No

Utah Code Ann. section 59-10-1003(1) and (2).

The credit applies only to a tax imposed by another state, the District of Columbia, or a U.S. possession.

Utah State Tax Commission, Commission Decision, Appeal No. 14-374 (Nov. 30, 2015).

Vermont

No

No

Vt. Stat. Ann. tit. 32, section 5825(a); Vermont Technical Bulletin No. TB-38 (Jan. 8, 2009).

Virginia

No

No

Va. Code Ann. section 58.1-332(A).

West Virginia

No

No

W. Va. Code section 11-21-20; W. Va. Code R. section 110-21-20.1.

Wisconsin

No

No, but see note.

Wis. Stat. section 71.07(7); Wis. Admin. Code Tax section 2.955(2m)(a).

Regarding new and revised taxes in Michigan and Texas beginning in 2008, the Wisconsin DOR has issued a notice stating that both the Michigan business tax and the Texas margin tax qualify for the credit for net income tax paid to another state if the other applicable requirements for the credit are met. (Feb. 28, 2008). This notice deals with the now repealed Michigan business tax.

Note: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington, and Wyoming have no personal income tax.

FOOTNOTES

1 Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015).

2 Zilka v. Tax Review Board City of Philadelphia, Nos. 1063 C.D. 2019, 1064 C.D. 2019, 2022 WL 67789 (Pa. Commw. Ct. Jan. 7, 2022).

3 See Robert Kantowitz, “A Tale of Two States and Two Cities,” Tax Notes State, Feb. 28, 2022, p. 965; and Walter Hellerstein, “Are State and Local Taxes Constitutionally Distinguishable? (Revised),” Tax Notes State, Feb. 14, 2022, p. 743.

4 Cal. Franchise Tax Board, Legal Ruling 2017-01 (Feb. 22, 2017).

5 Cal. Rev. & Tax. Code sections 18001-18011.

6 Beamer v. Franchise Tax Board, 19 Cal. 3d 467 (1977).

7 MCA Inc. v. Franchise Tax Board, 115 Cal. App. 3d 185 (1981).

8 Gray v. Franchise Tax Board, 235 Cal. App. 3d 36 (1991).

9 Hellerstein, supra note 3.

END FOOTNOTES

Copy RID