The United States Supreme Court has already announced that it will review three state tax cases in its upcoming term — Comptroller v. Wynne, Direct Marketing Association v. Brohl, and Alabama Department of Revenue v. CSX Transportation, Inc. This is unusual as the Supreme Court rarely reviews state tax cases. While none of these cases involve Texas tax law directly, they address federal constitutional issues that may impact the Texas sales tax and Texas franchise tax. We summarize each of these cases below.
Comptroller v. Wynne
This Maryland case will likely decide whether the Commerce Clause and Due Process Clause of the United States Constitution mandates that a taxpayers’ home states give them a credit or deduction for taxes they already paid on income they earned in other states. Currently, Maryland’s income tax, like that of most states, generally allows taxpayers to deduct income taxes paid to other states. However, Maryland allows this deduction only for its state income taxes, not the portions allocated to cities and counties. The taxpayer argued that was double taxation of income earned in interstate commerce, which violates the United States Constitution. Maryland relied on precedent stating that states have the power to tax all the income of their residents, including income earned in other states. The Maryland appellate courts sided with the taxpayer.
This decision could impact whether the Texas franchise tax allows credits or deductions for taxes paid to other states. Currently, the Texas franchise tax does not provide a credit or deduction for income or franchise taxes paid to other states.
Direct Marketing Association v. Brohl
This Colorado case addresses whether federal courts have the authority to hear certain state tax cases. The federal Tax Injunction Act generally prohibits federal courts from hearing lawsuits that seek to stop the collection of taxes. However, this lawsuit does not involve the collection of state taxes. It challenges a Colorado law that requires certain out-of-state retailers to report information about their Colorado customers to the Colorado Department of Revenue that would allow Colorado to potentially collect use tax from those customers on their purchases from out-of-state retailers. Some out-of-state retailers challenged the law in federal court, arguing that it violated the Due Process and Commerce Clauses of the United States Constitution.
Texas has yet to impose such reporting requirements on out-of-state retailers. However, to the extent that Texas does so in the future, or imposes any other similar indirect tax requirements, this case will clarify which courts will be able to hear any challenges to those laws.
Alabama Department of Revenue v. CSX Transportation, Inc.
This case asks whether Alabama’s tax on motor fuel used by railroads is unlawful because companies that transport freight by other means, such as by road or by water, do not have to pay such a tax on the fuel they use. This will mark the third time that the Supreme Court has heard a portion of this case. Now, the Supreme Court is poised to decide whether the tax violates a federal law prohibiting discrimination in taxes against railroads, and, in particular, when considering whether taxes violate this federal law, whether courts should look at other parts of a state’s taxing scheme rather than simply the tax provision being challenged in a particular case.
The Supreme Court’s ruling here may be important to any future challenges to Texas taxes involving railroads.
In conclusion, while none of these cases seem likely to have a direct, immediate impact on Texas tax law, the Supreme Court’s ruling could influence future lawmaking and future Texas tax litigation. We will keep a close eye on these cases and report back on this blog with any developments.