United States: Maryland Provides Taxpayer Guidance In Response To U.S. Supreme Court Decision In Wynne

In response to the recent decision by the U.S. Supreme Court in Wynne,1 Maryland has enacted corrective legislation allowing a credit for Maryland residents against county personal income tax for income taxed by other states.2 The Court had ruled that the failure of Maryland law to allow such a credit rendered Maryland's personal income tax scheme unconstitutional. The Department has also issued guidance for taxpayers affected by the ruling regarding how to obtain refunds.3


The Wynne case developed from the issues that often arise when taxpayers earn income from multistate businesses and attempt to rely upon the credit for taxes paid to other states in order to prevent duplicative levels of state and local taxation. Maryland's credit for taxes paid to other states was distinctive given that the structure of the income tax is directed to two separate levels of government. Maryland imposes a personal income tax on its residents that is comprised of a "state" income tax that is set at a graduated rate4 and a "county" income tax that is set at a rate that varies by county.5 While the two taxes are designated as state and county taxes, both of these taxes are actually collected by the state, with the county tax then being disbursed to the counties. If Maryland residents earned income in another state and paid income tax to the other state, Maryland law historically allowed them a credit against the "state" income tax, but not the "county" income tax.6

The taxpayers in Wynne,7 a married couple residing in Howard County, Maryland, received substantial income from an ownership interest in a federal S corporation providing

nationwide health care services. On both their 2006 federal and Maryland income tax returns, the taxpayers reported a portion of the S corporation's income as "pass-through income." On their Maryland return, the taxpayers claimed a credit against their personal income tax for taxes paid to other states. The S corporation filed state income tax returns in 39 different states and allocated to each shareholder a pro rata share of taxes paid. The Maryland Comptroller only allowed the taxpayers to apply the credit against their state income tax, disallowing the credit against the county income tax and resulting in the issuance of an assessment. The Hearings and Appeals Section of the Comptroller's Office and the Maryland Tax Court subsequently affirmed the assessment. However, the Circuit Court for Howard County reversed the assessment and held that Maryland's tax system violated the dormant Commerce Clause. The Maryland Court of Appeals, the state's highest court, affirmed the Howard County Circuit Court and concluded that the Maryland tax system was unconstitutional to the extent that it denied the taxpayers a credit against the county tax for income taxes they paid to other states. 8 The U.S. Supreme Court affirmed the Maryland Court of Appeals' decision and held that the lack of a credit against the county income tax violated the dormant Commerce Clause.9

Corrective Legislation

To correct the Constitutional violation, Maryland enacted legislation allowing a credit against county income tax for taxes paid to other states.10 Specifically, the new law allows Maryland residents to claim a credit against income tax for a taxable year based on income paid to another state.11 The credit is applied separately to the Maryland state income tax and the county income tax based on applicable rates.12

No credit is allowed for: (i) a resident other than a fiduciary, if the laws of the other state allow a similar credit for state income tax paid to Maryland; (ii) a resident fiduciary, if the fiduciary claims, and the other state allows, a credit for state income tax paid to Maryland; (iii) a resident for less than a full taxable year for tax on income that is paid to another state during residency in that state; and (iv) a nonresident.13 The credit allowed against Maryland income tax is generally based on the amount of allowable tax on income that the resident paid to another state,14 but must not reduce the income tax to an amount less than would be payable if the income subject to tax in the other state were disregarded. If the resident credit is based on tax paid by an S corporation to another state, the credit may not exceed that shareholder's pro rata share of the tax and is only allowed for other state taxes based on income.15

The legislation also limits use of the refundable earned income credit against state and county portions of the personal income tax to Maryland residents.16

Maryland Attorney General Response to Wynne

On May 29, the Maryland Attorney General issued two letters to the Comptroller regarding the effect of Wynne, in response to 2015 budget legislation which required the Attorney General to undertake a review of Wynne.17 The first letter examined "whether the decision, expressly or in effect, invalidates the practice under Maryland law of allowing, for State tax on income paid to another state, a credit only against the State income tax." In concluding that the Wynne decision rendered the Maryland credit mechanism unconstitutional, the Attorney General noted that the U.S. Supreme Court did not specifically prescribe what action Maryland must take in response to Wynne, but such system could be cured by granting a credit for taxes paid to other states. 18 The second letter examined "whether the decision, expressly or in effect, requires the payment of income tax refunds and interest attributable to taxable years beginning after December 31, 2005, but before January 1, 2015." The Attorney General summarily concluded that such payment was required, but contingent to and subject to compliance with other applicable provisions of Maryland law, including the statute of limitations.19

Guidance for Seeking Personal Income Tax Refunds

Also in response to the Wynne decision, the Comptroller has issued an initial version of "Frequently Asked Questions" for taxpayers seeking related refunds of personal income tax.20 The Comptroller will not automatically issue refunds, but will process requests based on the filing of amended returns in the order in which they are received. Previously filed protective refund claims which were held pending the outcome of the Wynne decision will also be processed.

For taxpayers who filed protective refund claims relating to Wynne, no additional forms need to be filed with the Comptroller at this time. In contrast, taxpayers who did not file protective refund claims prior to Wynne but now wish to file such claims must generally file an amended income tax return for each tax year at issue using Maryland Form 502X, as well as Maryland Forms 502LC and 502CR for each jurisdiction other than Maryland in which income was earned.21 Generally, amended returns must be filed within three years from the time a return was filed or two years from the time the tax was paid, whichever is later. Taxpayers who have already filed their 2014 tax year returns must also use Forms 502X, 502LC and 502CR to apply for a refund for such tax year. For all other taxpayers that have not filed a 2014 tax year return to date, Forms 502, 502LC and 502CR must be filed following the instructions provided by the Comptroller.22

Applicable Interest Rate

The associated amount of interest that Maryland will pay related to these refund claims is somewhat uncertain. Generally, for 2015 the interest rate for refunds is 13 percent.23 However, legislation enacted in 2014 requires the Comptroller to lower the interest rate applied to any refunds issued as a result of Wynne.24 Specifically, the Comptroller is directed to set the annual rate for these refunds at a percentage that equals the average prime rate of interest quoted by commercial banks to large businesses during fiscal year 2015, based on a determination by the Board of Governors of the Federal Reserve Bank. This would result in an interest rate of 3.25 percent. The Attorney General has approved this provision and indicated that it is constitutional and legally sufficient, stating that "entitlement to interest on a tax refund is a matter of grace which can only be authorized by legislative enactment."25


The prompt acquiescence by the Attorney General to the decision in Wynne and the immediate issuance of guidance by the Comptroller on refund claims is welcome news for impacted Maryland residents. It should be noted that for taxpayers earning income from multistate businesses who have not filed protective refund claims to date, the administrative burden in filing Form 502X, along with Forms 502CR and 502LC for each jurisdiction outside of Maryland, could be significant. The anticipated financial ramifications of Wynne in Maryland (particularly for the counties) are significant and certainly contributed to the related legislation limiting the amount of related interest to be paid to affected taxpayers. We still anticipate that the reduced interest rate paid with the refunds will be challenged, particularly by high-income taxpayers that have preserved their rights by filing protective refund claims for several years.


1 Comptroller of the Treasury v. Wynne, U.S. Supreme Court, No. 13-485, May 18, 2015. For a detailed discussion of this case, see GT SALT Alert: U.S. Supreme Court Holds Lack of County Personal Income Tax Credit for Taxes Paid to Other States Violates Commerce Clause.

2 Ch. 489 (H.B. 72), Laws 2015.

3 Frequently Asked Questions, Maryland Comptroller (Jun. 12, 2015). Affected taxpayers include Maryland residents who paid income tax to another state on income earned in that other state.

4 MD. CODE ANN., TAX-GEN § 10-703.

5 MD. CODE ANN., TAX-GEN §§ 10-103; 10-106. The county rate may not exceed 3.2 percent, which is imposed by several populous localities, including the city of Baltimore, Montgomery County and Prince Georges County.

6 MD. CODE ANN., TAX-GEN § 10-105(a).

7 Comptroller of the Treasury v. Wynne, U.S. Supreme Court, No. 13-485, May 18, 2015.

8 Maryland State Comptroller v. Wynne, 64 A.3d 453 (Md. 2013). For a detailed discussion of this case, see GT SALT Alert: Maryland Court of Appeals Rules Denial of County-Level Tax Credit for Taxes Paid to Other States Violates Commerce Clause.

9 Comptroller of the Treasury v. Wynne, U.S. Supreme Court, No. 13-485, May 18, 2015.

10 Ch. 489 (H.B. 72), Laws 2015.

11 MD. CODE ANN., TAX-GEN § 10-703(a).

12 MD. CODE ANN., TAX-GEN § 10-703(d).

13 MD. CODE ANN., TAX-GEN § 10-703(b).

14 MD. CODE ANN., TAX-GEN § 10-703(c)(1). The credit may not reduce the income tax to an amount less than would be payable if the income subject to tax in the other state were disregarded.

15 MD. CODE ANN., TAX-GEN § 10-703(c)(2).

16 MD. CODE ANN., TAX-GEN § 10-704. Previously, the credit was available to all individuals subject to Maryland personal income tax.

17 See Ch. 489 (H.B. 72), Laws 2015, §§ 26, 27.

18 Letter to the Honorable Peter V. R. Franchot, Comptroller of Maryland, and Karl Aro, Executive Director, Department of Legislative Services, Maryland Attorney General, May 29, 2015.

19 Letter to the Honorable Peter V. R. Franchot, Comptroller of Maryland, Maryland Attorney General, May 29, 2015.

20 See Comptroller of the Treasury of Maryland v. Wynne: Frequently Asked Questions, updated July 3, 2015. The Comptroller has indicated that this document will be updated as additional information becomes available.

21 Id. See Form 502LC. It should be noted that trusts and estates entitled to refund claims pursuant to Wynne may file an original or amended Maryland Form 504 (fiduciary income tax return), as appropriate, along with Forms 502CR and 502LC.

22 Comptroller of the Treasury of Maryland v. Wynne: Frequently Asked Questions. The appropriate tax year must be indicated at the top of Form 502LC. A completed, signed copy of the income tax return filed in the other state for which the credit is claimed must be attached. Finally, if a credit is claimed for taxes relating to more than one state, a separate Form 502LC must be completed for each jurisdiction, as well as a summary Form 502LC totaling the state tax credits and local tax credits for all Forms 502LC.

23 General Notice, Maryland Comptroller of the Treasury, Oct. 17, 2014.

24 Ch. 464 (S.B. 172), § 16, Laws 2014.

25 Review Letter, Maryland Attorney General, May 14, 2014, citing Comptroller v. Fairchild Industries, lnc., 493 A.2d 341 (Md. 1985); Comptroller v. Science Applications Int'l Corp., 950 A.2d 766 (Md. 2008); and Comptroller v. Campanella, 290 A.2d 475 (Md. 1972). The Attorney General also stressed that the provision is appropriate "because it will result in savings in the State budget."

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