In Comptroller of Treasury of Maryland v. Wynne, the U.S. Supreme Court handed us a crucial win—holding that state taxation rules run afoul of the dormant Commerce Clause if they result in double taxation. Vitally, the Wynne Court emphasized that in determining whether a state tax statute violates the dormant Commerce Clause, courts must consider not the formal language of the tax statute but rather its practical effect. To the extent that taxes are owed in one jurisdiction, a business (or individual) should be entitled to claim credits in full for taxes paid on that income elsewhere.
Wynne is of broad importance to the small business community nationally. Had the case gone the other way, small businesses would be discouraged from doing business across state lines. Now the Mississippi Department of Revenue is trying to do an end run around Wynne, and the NFIB Small Business Legal Center has filed in Mississippi’s Supreme Court to stop the state’s double taxation scheme.
For background, one of the most complicated aspects of state tax law is the question of which taxing authority is entitled to tax income generated in State A, when the taxpayer lives in State B (or has spent time in both states). In Kansler v. Mississippi Department of Revenue, the Kanslers paid taxes in Mississippi only to find out later—as a result of an audit—that they should have paid New York instead. But despite the fact that Wynne held definitively that they could not be double-taxes on the same income, Mississippi insists that it has no obligation to provide a refund because the couple missed a three-year statute of limitations for pursuing a refund. Under the Mississippi tax code, the state DOR would have allowed the Kanslers to pursue a refund if they had been audited by Mississippi; however, because they were audited by New York, the Mississippi DOR argues that they were not entitled to a refund at all.
That rationale fundamentally contravenes Wynne because it results in double taxation for the Kanslers. And the reality is that any small business owner doing business across state lines may be caught in this sort of double taxation trap. For example, suppose a small contractor, providing services throughout the south, should pay taxes on income earned in Texas only to find out later that he owed taxes on that income in Florida. If Texas should refuse to issue tax credits—for whatever reason—the practical effect would be that the contractor would be taxed twice on the same income. But, Wynne forecloses that possibility in its holding that businesses are constitutionally entitled to a tax credit under those circumstances. Therefore, we argue that the Kanslers must be allowed to pursue a refund because double taxation is strictly forbidden.