In Comptroller v. Wynne, the Supreme Court ruled that individuals who earn income in states in which they do not reside may be entitled to refunds if the taxes they pay to the nonresident state are not fully creditable against their resident state taxes.
This case involved residents of Maryland who held interests in an S corporation that did business in a number of states. Maryland taxed the S corporation’s income to the individual shareholders and allowed a credit for taxes paid to other states. Maryland also imposed a county income tax in addition to its state income tax, but Maryland did not allow its residents to claim a corresponding credit against their county income tax liability.
The Supreme Court found that Maryland’s failure to give credit against the county tax for taxes paid to the nonresident state violated the Commerce Clause of the U.S. Constitution by imposing undue burdens on interstate commerce. The Court found the failure to give credit against the county tax violated the “internal consistency” test that courts use to evaluate the effect of state taxation regimes on interstate commerce. Applying this test, the court first assumed that every state had adopted Maryland’s personal income tax law. It then asked whether, if every state had Maryland’s law, income generated in interstate commerce would necessarily be taxed at higher rates than income earned entirely within Maryland. According to the Court’s analysis, Maryland’s tax system imposed a higher tax rate on interstate commerce.
In Wynne, the state collected both the state and county-level taxes. It is unclear whether the fact that the county tax was collected by the state (rather than by the county government) made a difference to the Court’s decision. If it did not, residents of other states and localities using a credit system may be due refunds if any taxes they pay to other state and local governments are not fully creditable against their resident state and local income tax liabilities.
Maryland taxpayers who paid nonresident taxes that were not fully creditable against their individual Maryland income tax liability should be contacting their income tax return preparers and looking into filing refund claims. The general due date for refund claims is to file them within three years of the due date (or, in the case of a validly extended return, the date of filing) of the relevant return or two years from the payment of tax, if later. Residents of other states using a credit system that does not fully eliminate double taxation (for example, residents of New York City who are not allowed a credit for out-of-state taxes against New York City personal income tax) may also consider contacting their income tax return preparers about the statute of limitations in their state and possibly file protective claims for refund.