On Monday, May 18, the U.S. Supreme Court decided Wynne v. Maryland State Comptroller, a decision that will provide many Maryland taxpayers with the opportunity to receive refunds of State income taxes.
Maryland residents have been permitted to deduct income taxes paid to other states from the State portion of their Maryland income tax. However, Maryland has not permitted its taxpayers to apply out-of-state income taxes to reduce their liability for the “piggyback” tax that is collected by the State for counties and Baltimore City (rates vary between 1.25% and 3.2%).
The Supreme Court ruled in Wynne that Maryland’s failure to allow out-of-state income taxes to be credited against the piggyback tax violated the U.S. Constitution.
Prior to the decision, Maryland only allowed Maryland Taxpayers to take a tax credit for income taxes paid to other states against the state portion of the income tax. Taxpayers were not allowed a tax credit against the respective County/Baltimore City portion of the Taxpayer’s income taxes. The Supreme Court ruled that such disallowance violated the Constitution because it burdened interstate commerce by double taxing income earned in other states. Maryland must now permit a credit against the County/Baltimore City portion of the income tax liability for individuals. This ruling primarily affects Maryland residents who conduct business and incur tax liability in other states. This ruling provides relief against double taxation for many Maryland residents who earned income from S corporations or partnerships that operated in other states. Such residents should be eligible for refunds of excess county income taxes paid.
Maryland permits income tax returns to be amended within three years after their due dates. Therefore, Maryland state income tax returns for 2013 and 2014 may be amended. Furthermore, any income tax returns for 2011 that were filed under extension to October 2012 may also be amended. Additionally, taxpayers who have already filed protective claims for refund for these or earlier years in anticipation of a taxpayer-favorable ruling in Wynne will also be entitled to receive refunds from Maryland. Taxpayers submitting valid refund claims will be entitled to receive interest on the overpaid tax in addition to refund of the overpaid tax itself.
The Comptroller’s office has estimated that the Wynne decision will affect approximately 55,000 taxpayers, that up to $200 million may be owed on refund claims and that the annual tax impact on Maryland in future years will be in excess of $42 million, with approximately one-half of that affecting Montgomery County taxpayers.
Given the heavy volume of refund requests that it will have to process as a result of the Wynne decision, the Comptroller’s office may well establish special procedures for submission and processing of these types of refund claims. We would expect the Comptroller’s office to provide guidance on this within the next several weeks.