Maryland Court of Appeals upholds remedy for residents who had paid county income taxes on income earned in other states.
In a unanimous decision, the Maryland Court of Appeals has ruled that the General Assembly acted within the Constitution in providing that Marylanders who had paid an unconstitutional tax would be reimbursed at an interest rate pegged to the prime rate used by banks, but less than the 13% interest rate paid on certain other refunds.
The decision is the latest chapter in litigation between Brian and Karen Wynne and the Maryland State Comptroller. The Wynnes initially challenged the constitutionality of Maryland’s income tax system — in particular, the credit allowed against a Maryland resident’s income tax liability based on taxes the resident paid to other states on income derived from those states.
Although Maryland allowed credit for out-of-state taxes paid by residents and non-residents, the state did not apportion or apply that credit to a taxpayer’s county taxes.
The prohibition on the local income tax deduction and the case went all the way to the Supreme Court. In a 5-4 decision, the U.S. Supreme Court ruled that the failure to take out-of-state taxes into account in determining the Maryland residents’ county taxes violated the dormant Commerce Clause.
Subsequently, the Maryland General Assembly enacted a new law that provided a refund interest rate of 3% for the out-of-state collected taxes instead of the state’s regular 13% refund interest rate. The remedy was estimated to save counties approximately $30 to $40 million.
However, the Wynnes challenged the remedy, arguing that that the different refund rates for out-of-state wage earners violated the Commerce Clause in a similar manner to original deduction prohibition.
The Maryland Tax Court found for the Wynnes but they lost on appeal in Anne Arundel County Circuit. The Wynnes then successfully appealed the case directly to the Court of Appeals, bypassing the Court of Special Appeals. It is unknown whether the Wynnes will seek judicial review from the U.S. Supreme Court.
The amount of money owed by counties for the refunds paid is extraordinarily high, at around $250 million. As previously reported on Conduit Street, the General Assembly this year passed HB 621 – County Tax Fairness Act, legislation that delays the requirement for local governments to repay the Local Income Tax Reserve Account for refunds paid pursuant to the Wynne case.
Taxpayers have already received their proper refunds and interest. HB 621 merely addresses the remaining matter of bookkeeping for the state-managed reserve account.
Stay tuned to Conduit Street for more information.