In a 5-4 decision, the United States Supreme Court has ruled Maryland’s refusal to grant a credit for tax paid to nonresident states against the local county tax violates the dormant commerce clause of the Constitution of the United States. The Court relied on a series of precedents that discriminated against interstate commerce. See Comptroller of the Treasury of Maryland v. Wynne et ux (No. 13-485). Going forward, Maryland residents will be allowed to claim this credit against both the state and county level tax.
Due to the large number of businesses operating as pass-through entities for tax purposes, this case has been closely watched as Maryland resident owners in partnerships, S corporations, limited liability partnerships, and limited liability companies are liable for income taxes on their share of entity income. The Court’s decision protects this income from being taxed more than once.
The Maryland Attorney General will next review the Court’s opinion. Once confirmed that refunds are to be paid, the comptroller’s office will be directed to begin reviewing and processing the protective refund claims. The state will recover the taxpayer refunds by withholding amounts from the quarterly payments it makes to the respective counties beginning in June 2016. It is estimated that Maryland owes over $200 million in refunds and interest to taxpayers who have filed protective claims.
Taxpayers and state revenue authorities are studying the Wynne ruling to determine if it has implications for similar credit mechanisms in other states. Protective claims should continue to be filed, if not done so already, for open years under statute.
Historically, Maryland has allowed a state tax credit on a Maryland resident income tax return for taxes paid to other states; however, this credit has not been available to offset the local county tax calculation. This treatment was challenged in the Maryland courts and held as unconstitutional by the Maryland Court of Appeals—a taxpayer victory. The Comptroller of Maryland appealed the decision to the Supreme Court last year with oral arguments heard in November. The Wynne decision affirms the decision of the Maryland Court of Appeals that the tax unconstitutionally discriminated against interstate commerce.
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