The U.S. Supreme Court has spoken: Double-taxing the income that Maryland residents earn in other states is unconstitutional.
In a 5-4 ruling, the Supreme Court has struck down Maryland’s income tax law because it does not provide state residents with a full credit for tax paid on income that they earned in other states. The Washington Post’s Bill Turque called it “a ruling likely to cost Maryland counties and localities across the country millions of dollars in revenue.”
Indeed, some estimates say the ruling could cost Maryland up to $200 million in refunds to taxpayers who had previously tried to claim the credit.
“Thousands of Maryland residents who do multi-state business and pay taxes in other states will now be treated fairly and will no longer be paying double tax on non-Maryland business income,” said Karen Syrylo, CPA, a director with Altus State & Local Tax and Advisory and a member of the MACPA’s State Tax Committee.
The ruling is a victory for the CPA profession in Maryland. Syrylo herself helped launch the argument of constitutionality while the case was in its early phases at the Maryland Tax Court level.
Writing for the majority, Justice Samuel Alito Jr. said Maryland’s tax law violates the spirit of the Commerce Clause, which “gives Congress the power to regulate commerce among the states (but) also was intended to ensure that states will not pass laws to restrict interstate business,” Turque writes.
“The majority painted its decision as fitting within the mainstream of Commerce Clause jurisprudence,” Forbes writer Daniel Fisher adds. “The Supreme Court repeatedly has struck down taxes that subject businesses to higher rates on dollars they earn in interstate commerce, Alito wrote, so there was no reason to make an exception for individuals.”
In its decision, the Supreme Court affirmed an earlier Maryland Court of Appeals ruling in the case of Maryland Comptroller of the Treasury v. Wynne. Beverly Bareham, CPA, a member of the MACPA’s State Tax Committee, explains the details of the case this way:
The Wynnes are Maryland residents and shareholders in a pass-through entity. The income of the pass-through entity is taxed in other states. Maryland also taxes this income, but grants a credit for taxes paid to the other states to offset the Maryland state tax and prevent double taxation on the income. In addition to the state income tax, Maryland also collects a “piggyback” tax for county purposes. Maryland’s long-standing position has been to not grant a credit against this portion of tax.
The “piggyback” tax is an additional portion of state income tax, and even non-residents have to pay an equivalency through the “special non-resident tax.”
The Supreme Court held that not granting the credit against the additional portion of tax is unconstitutional because it violates the dormant Commerce Clause. This is particularly seen through the internal consistency test. If every state adopted Maryland’s tax structure, taxes would be lower on in-state business as compared to interstate business.
Syrylo said Maryland’s General Assembly enacted a clause earlier this year in the event that the Supreme Court ruled against the state. That clause instructs state Comptroller Peter Franchot to begin processing refund claims immediately. After reviewing each claim to make sure it is proper, the Comptroller’s Office could begin issuing refund checks this summer, Syrylo said.
Process for handling extended returns, claims under reviewRepresentatives from the Maryland Comptroller’s Office and the MACPA’s State Tax Committee have had some preliminary discussions and continue to meet to determine the logistics of compliance with the Supreme Court’s ruling.
Details will be provided once they determine how to handle the filing of extended 2014 returns with the piggyback credit, the processing of “protective claims,” and the processing of newly filed and amended Wynne returns.
Patience is urged as these details are finalized.
Read more about the Supreme Court’s decision: