Tax Alert U.S. Supreme Court Rules on Constitutionality of Maryland Personal Income Tax Credit – Will Other Jurisdictions Be Impacted?
2013 TAX PRACTICE BOARD Stephen Brecher 646.225.5921
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In a landmark decision, the U.S. Supreme Court recently ruled in Comptroller of the Treasury of Maryland v. Wynne that Maryland’s failure to allow a personal income tax credit for taxes paid to other jurisdictions against the county portion of its resident income tax is unconstitutional.
imposes both state and county income taxes on resident Avoid Fiscal CliffMaryland Timothy Burley taxpayers. A credit is permitted for taxes paid to other jurisdictions only 212.375.6508
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against the state portion of the tax and is limited to the tax that would have been paid to Maryland. This limitation results in double taxation for a Maryland resident on the county portion of the tax. The taxpayers in Wynne were residents of Maryland and shareholders in a Subchapter S Corporation that passed through income requiring the Wynnes to file individual nonresident tax returns in over 30 states. The Wynnes filed their 2006 Maryland resident return claiming credits for taxes paid to the 30+ other states against both their state and county taxes. The Maryland Comptroller allowed the taxpayers a credit against their Maryland state income tax, but disallowed a credit against the county tax. The effect of Maryland’s disallowance of the county credit was double taxation that resulted in more tax paid by the Wynnes than would be paid by a non-resident shareholder, who would pay tax only on the amount apportioned to the state and county. After several appeals, the Maryland Court of Appeals, and ultimately the U.S. Supreme Court, ruled that Maryland’s failure to allow a credit against the county tax was unconstitutional. The Supreme Court’s rationale in striking down
Maryland’s taxing structure was that a resident should not pay more tax on interstate income than intrastate income as this serves to discriminate against interstate commerce. While the Supreme Court did not dictate how Maryland should correct its tax structure, Maryland has issued guidance advising taxpayers to file amended returns for all open years (within 3 years of the original filing date) in order to secure a refund of overpaid taxes. The implications of the Wynne decision relative to other local taxes and non-resident versus resident biases could be broad. A first indication of a potential claim along the lines of Wynne would be the occurrence of double taxation. For example, a New York resident who is also resident in another state: New York State and City do not allow a credit for taxes paid on intangible income, such as capital gains, interest and dividends on personal investments resulting in double taxation for certain dual resident taxpayers. Beyond the indication of double taxation, the analysis of a particular situation and state taxing scheme can be complex. Please contact your WeiserMazars tax professional or a member of our State & Local Tax Group to discuss this case and whether protective refund claims should be filed in other jurisdictions.
Harold Hecht, CPA Director 646.225.5953 Harold.Hecht @WeiserMazars.com Seth Rabe, JD, LLM Senior Manager 212.375.6877
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