Maryland Provides Taxpayer Guidance In Response To U.S. Supreme Court Decision In Wynne

In response to the recent decision by the U.S. Supreme Court in Wynne,1 Maryland has enacted corrective legislation allowing a credit for Maryland residents against county personal income tax for income taxed by other states.2 The Court had ruled that the failure of Maryland law to allow such a credit rendered Maryland's personal income tax scheme unconstitutional. The Department has also issued guidance for taxpayers affected by the ruling regarding how to obtain refunds.3

Background

The Wynne case developed from the issues that often arise when taxpayers earn income from multistate businesses and attempt to rely upon the credit for taxes paid to other states in order to prevent duplicative levels of state and local taxation. Maryland's credit for taxes paid to other states was distinctive given that the structure of the income tax is directed to two separate levels of government. Maryland imposes a personal income tax on its residents that is comprised of a "state" income tax that is set at a graduated rate4 and a "county" income tax that is set at a rate that varies by county.5 While the two taxes are designated as state and county taxes, both of these taxes are actually collected by the state, with the county tax then being disbursed to the counties. If Maryland residents earned income in another state and paid income tax to the other state, Maryland law historically allowed them a credit against the "state" income tax, but not the "county" income tax.6

The taxpayers in Wynne,7 a married couple residing in Howard County, Maryland, received substantial income from an ownership interest in a federal S corporation providing

nationwide health care services. On both their 2006 federal and Maryland income tax returns, the taxpayers reported a portion of the S corporation's income as "pass-through income." On their Maryland return, the taxpayers claimed a credit against their personal income tax for taxes paid to other states. The S corporation filed state income tax returns in 39 different states and allocated to each shareholder a pro rata share of taxes paid. The Maryland Comptroller only allowed the taxpayers to apply the credit against their state income tax, disallowing the credit against the county income tax and resulting in the issuance of an assessment. The Hearings and Appeals Section of the Comptroller's Office and the Maryland Tax Court subsequently affirmed the assessment. However, the Circuit Court for Howard County reversed the assessment and held that Maryland's tax system violated the dormant Commerce Clause. The Maryland Court of Appeals, the state's highest court, affirmed the Howard County Circuit Court and concluded that the Maryland tax system was unconstitutional to the extent that it denied the taxpayers a credit against the county tax for...