- The Washington Times - Monday, May 18, 2015

The U.S. Supreme Court on Monday struck down a Maryland income tax law, calling it “discriminatory” because it doubled the tax on income residents earned in other states.

The 5-4 ruling will cost the state millions of dollars in revenue as residents who work out of state may now be able to reduce their future tax liability and seek refunds for prior years.

Maryland levies a state income tax and collects county income taxes in each of the state’s 23 counties and the city of Baltimore. While Maryland allows residents to claim a credit against the state tax for taxes paid to other states where the money was earned, it does not allow them to do so for the county taxes.

“The effect of this scheme is that some of the income earned by Maryland residents outside the State is taxed twice,” Justice Samuel Alito wrote in the 28-page opinion.

The Maryland Office of the Comptroller estimates that it has received 8,000 refund claims thus far totaling $202 million. The state estimates that about 55,000 taxpayers could be eligible to seek refunds under the ruling, though the per-person refund would vary widely based on the amount of income earned.

“Really who it’s going to apply to are members of LLC’s, owners of partnerships and owners of S corporations who do business in multiple states,” said lawyer Lance Jacobs, a Maryland tax specialist.

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The case was brought by Howard County couple Brian and Karen Wynne, who owned a percentage of a health care company that does business in 39 states.

The Wynnes had paid $123,434 in taxes to Maryland in 2006 after applying a credit of $84,550 for taxes paid in other states on income earned outside Maryland. But the state comptroller said the credit was improperly applied and ordered them to pay the rest. The couple took the case to court, and their claims were supported by both the Howard County Circuit Court and the Maryland Court of Appeals.

“Maryland’s tax scheme is inherently discriminatory and operates as a tariff,” wrote Justice Alito, who was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Sonia Sotomayor.

Maryland officials worry about the fiscal impact the ruling will have on local counties.

“We are disappointed in the Supreme Court’s decision, which creates severe challenges for counties looking to meet the education, public safety and infrastructure needs of Marylanders,” said David Nitkin, a spokesman for the Office of the Attorney General.

In addition to the refunds that the comptroller’s office estimates will have to be paid out to taxpayers like the Wynnes, the state is set to lose an estimated $42 million in revenue annually as residents claim the credit on out-of-state income in future years.

A statute of limitations prevents taxpayers who are denied the county income tax credit from amending filings and seeking refunds dating back more than three years, said Michelle Byrnie-Parker, a spokeswoman for the comptroller. But those who already filed claims will be able to seek refunds dating back three years from the year they filed the claim — back to 2006, the year the issue was brought into question in the Wynne case.

Montgomery County will be hit the hardest financially as it has the most residents claiming out-of-state credits. A comptroller’s analysis notes that in 2011 the county had 15,000 taxpayers claiming the out-of-state credit and estimates the year’s refunds would total $24 million.

Montgomery County Council President George Leventhal said the county expects to lose $10 million in fiscal 2016 and estimates it could see losses of $55 million in future fiscal years.

“It certainly affects our long-range planning for our budget in the future,” Mr. Leventhal said. “It’s a challenge. We are going to have to say, ‘No, we aren’t going to be able to spend as much as the community would like.’”

The same estimates put the next highest financial impact on Baltimore County, at $4.5 million, followed by Anne Arundel County, at $3.5 million.

Montgomery County Executive Isiah Leggett already has floated the possibility of property tax increases next year to shore up other financial instability.

Gov. Larry Hogan’s office declined to comment on the ruling and what it would mean for Maryland finances on the grounds that the Office of the Attorney General was still reviewing the decision.

With the Republican governor eager to decrease Maryland taxes, Mr. Jacobs said that counties may have act on their own if they want to recoup the funds.

“Last year with a Democrat governor and every being Democrat, I think the fix would have been easier,” he said.

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