Don't Mess With Taxes

Maryland's county piggyback tax system essentially double taxes Old Line State residents who earn money in other jurisdictions.

That's the ruling handed down today by the U.S. Supreme Court in Maryland's fight with Bryan and Karen Wynne.

State vs. county tax credits: The Wynnes earned income passed through to them from their ownership stake in Maxim Healthcare Services, Inc. The couple then claimed an income tax credit on their 2006 Maryland tax return for income taxes paid to other states where Maxim operates.

The Maryland Comptroller allowed the Wynnes a credit against their Maryland state income tax, but not against the Howard County income tax that piggtybacks onto the state system.

I remember these added taxes well from our years in Maryland. We shortened the name to piggy taxes, since they were just feeding on our other tax calculations.

In writing the 5-4 majority opinion for the High Court, Justice Samuel Alito said the tax "is inherently discriminatory" under the Constitution's Commerce Clause.

"Bottom line, a state cannot tax its individual residents without dormant commerce clause restraints," says Katina Peterson is a partner at the international law firm Dorsey & Whitney in the Tax, Trusts and Estates department and is Co-Chair of the Tax Controversy and Litigation practice group. 

"By denying a full credit for personal income taxes paid to other states, Maryland's personal income tax regime subjects its residents to double taxation; it is taxing income that has already been fully taxed by another state," says Peterson.

The justices who dissented argued that the majority ruling goes too far in saying the Commerce Clause could block state efforts to tax their residents.

Millions in refunds possible: Maryland taxpayers who tried to claim the county tax credit on their tax returns between 2006 and 2014 are likely to be eligible for refunds. One estimate by the Comptroller’s office is as much as $200 million with interest.

State tax watchers say the ruling also could affect similar tax laws in nearly 5,000 local jurisdictions in other states, including New York, Indiana, Pennsylvania and Ohio.

Maryland tax professionals, what say you about this ruling? Do you have clients that will be affected?

And folks in the other states that could face complications now that the Supreme Court justices have ruled, are you taking any steps? O are you just waiting to see what your state officials will do in the wake of Wynne?

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