US Supreme Court Decision - Maryland Discriminated in Favor of Intrastate Over Interstate Economic Activity

US Supreme Court decision - Maryland discriminated in favor of intrastate over interstate economic activity – could result in refund opportunities for Maryland residents

Brief Summary:

The United Sates Supreme Court ruling in "Comptroller of the Treasury of Maryland v. Wynne"  decided in a 5-4 decision on May 18, 2015 that Maryland's personal income tax "discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting in­terstate commerce to the burden of ‘multiple taxation'. " They held that the lack of a credit for taxes paid to another state on pass-through income as an offset to Maryland's local portion ("county tax") of the state personal income tax as unconstitutional. They deemed the tax as operating as a "tariff" and a direct violation of the dormant Commerce Clause.

Maryland, like other states holds the right to impose certain tax burdens under the Due Process Clause of the Fourteenth Amendment, which allows a state to tax, "all income of its residents, even income earned outside the taxing jurisdiction"; however although they can impose a tax this does not grant them the right to violate the Commerce Clause by burdening interstate commerce. Justice Alito delivered the opinion of the Supreme Court and agreed with the decision made by Maryland's highest court which also decided that this feature of Maryland's tax scheme violates the Federal Constitution.

Details:

Maryland's personal income tax raises revenues by imposing upon its residents two taxes (A "state" income tax and a "county" income tax. The "state" income tax is set at a graduated rate while the "county" tax varies amongst counties with a maximum rate of 3.2%. Although Maryland designates one as a "state" tax and one as a "county" tax, both of them are actually state taxes collected by the Comptroller of the Treasury. Maryland allows a credit for taxes paid to another state to offset the "state" tax; however before this ruling there were no credits allowed to offset the "county" tax. Essentially this causes part of the income earned outside of Maryland by Maryland residents to be taxed twice (once by Maryland and once in the state the income was derived from). In regards to nonresidents of Maryland, they pay the "state" income tax on income that they earn from sources within Maryland. Nonresidents not subject to the "county" tax must pay a "special nonresident tax" instead of the "county" tax. The "special nonresident tax" is levied on income earned from within Maryland, and the rate is equal to the lowest county income tax rate set by any Maryland county.

Who is included and what does this mean for everyone?

The ruling applies to residents of Maryland who paid the Maryland personal income "county" tax in conjunction with taxes paid to other states for the tax years beginning after December 31, 2005, but before January 1, 2015. Maryland defines an "individual" as a natural person or a fiduciary. This means that a Maryland resident trust or estate with credits for taxes paid to other states can also claim a refund for the "county" tax if applicable. The ruling by the Supreme Court deems Maryland's practice invalid and will require the payment of income tax refunds and related interest for the tax years and taxpayers mentioned above.

For additional information contact the author Michael P. Desiante, CPA at mpdesiante@herbein.com