Reciprocal Income Tax Agreements in the US

Reciprocal income tax agreement is also known as reciprocity. It is an agreement between the states in

US which exempts residents working in other states from being taxed again for the same earnings. This

arrangement saves them from the trouble of double taxation. The arrangement implies that a resident of

a state working in another state will be exempt from taxes on earnings in the work state.

For example: Michigan has reciprocal agreements with a number of states including Minnesota, hence a

resident from Minnesota working in Michigan does not have to pay tax to Michigan on his/her earnings

from Michigan. In essence this has simplified the taxing process for people who are residents of one state

but work in another. Double taxation was a critical issue which lead to tax payers having tax liability in

multiple jurisdictions the reciprocity agreements saves the tax payers from having to file returns in two

jurisdictions.

The US Supreme Court addressed the matter in the case of Comptroller of the Treasury of Maryland Vs

Wynne ET UX1

The case was with respect to a case files by a couple from Maryland Brian and Karen Wynne, who stated

that they have been forced to pay income tax in Maryland on earnings which have already been taxed in

another state.

The Supreme Court held that the tax scheme followed by Maryland is not acceptable on a 5-4 majority.

The court opined that the Dormant Commerce Clause2 in the constitution renders the taxing scheme in

Marlyland unconstitutional as it does not satisfy the internal consistency test. Internal consistency test

merely checks whether the state tariffs and laws affect interstate commerce, In the instant case Maryland

refused to exempt earnings for which tax was paid in other state which violated the dormant commerce

clause.

The tax reciprocity arrangement covers only the wages and earnings that the resident earns in the work

state. It does not cover the income earned from other sources outside the employment. It only covers the

state and local taxes and will not have an implication on the taxes on federal payroll. The employees will

have to notify the employer to withhold taxes for their home state and once that is notified the employer

will have to stop withholding taxes for the work state.

This arrangement has managed to save the residents from the damaging practise of over-taxation. The

Maryland decision has a far reaching implication on double taxation practises in the whole of United

states.

1
575 US _ (2015)
2
Art. I, 8, clause 3 of the U.S. Constitution