Maryland is known for crabcakes, a beautiful capital city, a mediocre baseball team, a great law school (Jeff Friedman snuck this edit in), and, now, unconstitutional tax laws. A taxpayer won a constitutional challenge to the Maryland personal income tax, which prohibited a credit against the local income tax for taxes paid to other jurisdictions. Brian Wynne v. Md. State Comptroller, Case No. 13-C-10-80987 (June 20, 2011).
Maryland, like most states, permits resident taxpayers a credit for taxes paid to other jurisdictions to offset the state’s personal income tax. Md. Code Ann. § 10-703(a). The Maryland statute, however, only provided a credit against the state income tax and did not provide a credit against county income taxes. The Howard County Circuit Court, reversing the Maryland Tax Court, held that a Maryland statute violated the Commerce Clause because it did not permit the taxpayer to take a credit against the Baltimore portion of the personal income tax for taxes paid to other jurisdictions.
The taxpayer challenged the Maryland statute, arguing that the statute violated the Commerce Clause because it burdened Maryland residents that conducted interstate business. While the Maryland Comptroller attempted to argue that the Commerce Clause did not apply, the court summarily dismissed the Comptroller’s arguments. In holding the statute unconstitutional under the Commerce Clause, the court stated that the “county income tax” was really a state tax because components of it are not a “local” tax. The court held that the statute failed the Complete Auto four-part dormant Commerce Clause test because Maryland discriminated against interstate commerce by taxing a transaction more heavily when it crossed state lines than when it occurred entirely within Maryland. Further, the court held that the statute failed the internal consistency test because, if this tax was imposed by all states, it would result in multiple taxation. Moreover, the court held that the tax failed the external consistency test, set forth in Jefferson Lines, because it taxes residents earning income outside of Maryland’s borders and its credit did not attempt to avoid multiple taxation.
Although the Comptroller may appeal this case, Maryland taxpayers should consider filing refund claims prior to the statute of limitations expiring for taxes paid as a result of the unconstitutional credit regime.