The US Supreme Court just might give you a state income tax refund next year. (Or maybe not.)
On May 27, the Supreme Court agreed to hear a case involving a Maryland income tax credit that, according to the highest court in Maryland, is structured in a way the violates the US Constitution. The case, known as Comptroller v. Wynne, was brought by Brian and Karen Wynne, Maryland residents who earned income in multiple states. The Comptroller had assessed additional tax for reasons completely unrelated to this credit, and after appealing that assessment, the Wynnes added this constitutional challenge as an alternate reason why they should not have to pay.
Maryland generally taxes all income earned by a Maryland resident, even if the income was earned in another state. If that other state also taxes the same income, any tax paid to the other state counts as a credit against Maryland tax. But there’s a catch. Maryland income tax is really two different taxes: a state-level tax and a county-level tax. Under Maryland law, this credit applies only to the state-level tax.
The Wynnes paid income tax to some other states in amounts higher than that imposed under Maryland’s state-level tax. Their out-of-state tax payments were thus larger than necessary to eliminate all Maryland state-level tax on that income. But the Wynnes were unable to apply any additional credit against their county-level tax. This, they said, results in a greater overall tax burden and effectively penalizes them for earning out-of-state income.
The case eventually came before the Maryland Court of Appeals, which decided that the tax credit violated the “dormant Commerce Clause” of the US Constitution. The Court relied on numerous US Supreme Court cases holding that, while states are generally free to tax their citizens, states cannot structure their tax in a way that interferes with the free flow of interstate commerce. The Court of Appeals concluded that Maryland violated this rule because the limited tax credit tends to discourage Maryland residents from earning their income via interstate commerce.
If the US Supreme Court affirms, you might be able to claim a Maryland tax refund. It may even be worthwhile to file a claim for refund now for any open years that might close before the Court decides the case (no later than June 2015).
But don’t spend your refund just yet. The fact that the Court decided to take this case could mean some of the Justices are inclined to reverse. The Court also asked for the opinion of the US Solicitor General, who advised the Court to take the case so that it could reverse the decision of the Maryland Court of Appeals.
Here is a link to more information on the scotusblog website: http://www.scotusblog.com/case-files/cases/comptroller-v-wynne/