By: David S. De Jong
Media Type: Alert
By a 5-4 vote, the U.S. Supreme Court on May 18, 2015, rejected Maryland’s argument that it has an unlimited right to tax its residents and that any credits are a matter of legislative grace. As a result, Maryland will need to credit taxes paid to other states not only against the portion of Maryland taxes staying with the State but also the portion going to the counties.
Bryan Wynne owned stock in an S corporation which did business in most of the country, necessitating that he pay taxes on the flow-through income in a number of states. Maryland properly imposed its tax on his entire income but restricted an offsetting credit to a maximum 5.75 percent of taxable income representing the State’s portion of the combined tax rather than the full 8.95 percent (including the 3.2 percent “piggyback” to Howard County). As a result, Mr. Wynne’s income earned in states with a tax rate higher than 5.75 percent was subject to double state taxation.
Mr. Wynne and his wife sued, alleging that Maryland’s failure to offer a credit to offset the county “piggyback” portion was an undue burden on interstate commerce. A Howard County Circuit Court judge agreed as did the Maryland Court of Appeals in a 5-2 decision. The U.S. Supreme Court agreed to hear Maryland’s appeal. With argument on the most important case on state taxation of individuals in decades on the horizon, Stein Sperling principal David De Jong was asked by attorneys for the Wynnes to be lead counsel on an amicus curiae brief in support of their position.
Maryland argued in its brief and in oral argument that taxes on residents are not subject to tests of discrimination under the Commerce Clause. Attempting to distinguish individuals from corporations, the State cited the benefits that the Wynnes received from residency including education and health benefits.
Notwithstanding, the taxpayers argued in their brief and in oral argument that the Commerce Clause required Maryland to fairly apportion the tax burden and not discriminate against interstate commerce. The amicus brief focused on several angles, most particularly that the county piggyback is really a state tax collected by Maryland and parceled out to the counties in the form of revenue sharing, such that Maryland only offers limited mitigation of the effects of double taxation. It also espoused that the State’s position gives less favorable tax treatment to S corporations and unincorporated businesses than C corporations which are substantially protected from double taxation through an apportionment mechanism.
As is usual in tax cases, the decision of the Supreme Court bypassed ideological lines. The majority opinion of Justice Alito, considered a conservative, was joined by moderates Roberts and Kennedy and well as liberals Breyer and Sotomayor. Liberal Justices Ginsberg and Kagan joined conservatives Scalia and Thomas in dissent.
Many Marylanders filed protective claims for refund during the years that Wynne was pending in the courts. They will soon get their refunds. Those who did not claim credit for taxes paid to other states against both portions of the Maryland tax may file amended returns for up to three years.
However, with the decision of the U.S. Supreme Court, controversy has not ceased. In anticipation of refunds in excess of $200 million, Maryland in 2014 reduced its interest rate retroactively on Wynne-related refunds from 13 percent to the average prime rate, proffering now that any payment of interest is also out of legislative grace. The stage is set for new litigation.
Stein Sperling assists clients in the legal, tax and practical issues associated with multistate businesses. For more information, please call a member of our tax law department at 301-340-2020.
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