On May 18, 2015, it was announced that the United States Supreme Court ruled in favor of the taxpayers in the case of Maryland Comptroller of the Treasury v. Wynne. This is a major victory for affected taxpayers.
Maryland, as other states, allows a credit against Maryland state tax for the tax paid to other states on income earned by Maryland residents but taxed in both states – Maryland because taxpayer resides here, and the other state because the income is earned there (perhaps from a business or on wages). However, Maryland’s tax has two components: a state tax of up to 5.75%, and a county “piggyback” tax at rates ranging by county from 1.25% to 3.2%. Maryland only allowed the credit on the state tax, not the county piggyback tax. The Wynnes contended that the local tax collected on the state return (a unique to Maryland situation) was in fact a state tax, resulting in double taxation by Maryland on non-MD income of MD residents. The Maryland Court of Appeals and now the US Supreme Court agreed with the Wynnes.
This does not necessarily apply to ALL credits for state income tax paid elsewhere. Wynne is based on tax paid by an individual arising from interstate commerce, and is specific to taxpayers with nonpassive, business income flowing through from non-MD sources such as S Corporations.
It’s been estimated that this will cost Maryland jurisdictions over $190 million in lost tax revenue, plus interest; this will put even more pressure on the process of balancing both state and local budgets.
If you have been aware of this case and have already filed a “protective” claim for refund by filing an amended MD return specific to this issue, Maryland should (eventually) process that return as a result of this decision and allow the refund.
If you have not filed such a claim for all open years, but believe you may have income from non-MD sources engaged in interstate commerce that could result in a refund based on this case, please contact our office to discuss the matter. Note that claims for refund filed more than three years after the date the relevant return was due or filed generally are barred.
Lastly, while Maryland must allow interest on the claims for refund, thanks to a bill passed by the MD Legislature in the 2014 Session, that interest will be paid at a rate based on the prime rate (roughly 3%) rather than the 13% normally paid. There is some thought that THIS is no more supportable than the underlying law; stay tuned, as only time will tell.