By Ashley S. Westerman
WASHINGTON (Oct. 2, 2014)—The U.S. Supreme Court is set to hear a case involving a Maryland couple who believe their out-of-state income should not be taxed by their state of residence.
Brian and Karen Wynne of Howard County argue the income they earn in several other states through Maxim Healthcare Services Inc., a company Mr. Wynne partially owns, should not be taxed by Maryland if they pay the income taxes in those other states.
Maryland has an out-of-state income tax credit that can be used to offset state income taxes. But there is no equivalent credit that can be used to offset county income taxes, so counties can tax the out-of-state income.
According to court documents, Comptroller of the Treasury of Maryland v. Wynne (No. 13-485) asks the question: "Does the United States Constitution prohibit a state from taxing all income of its residents—wherever earned—by mandating a credit for taxes paid on income in other states?"
The Wynnes argued in Maryland Tax Court that the partial credit violates the dormant Commerce Clause.
University of Maryland Carey School of Law Professor Mark Graber said the dormant Commerce Clause says "there are some state regulations of interstate commerce that are unconstitutional even when Congress does not act."
"So there is no federal law that prohibits or requires states to give tax credits for taxes paid in other states," Graber said. "But the claim the Wynnes are making is that, in fact, Maryland's failure to do so sufficiently burdens interstate commerce."
When the Maryland Tax Court sided with the comptroller, the Wynnes appealed to the Maryland Court of Appeals, the state's highest court, which sided with them.
Dominic Perella, the Wynne's counsel, said his client believes he "shouldn't have to pay double taxes" and that the way Maryland structures its taxes punishes him for growing a successful business.
But Maryland has argued in court documents that, among other points, it has the right as a sovereign state to tax the entirety of its residents' income, regardless of where the income was generated or if taxes on that income were paid in other states. The Maryland Attorney General's office said it does not comment on pending litigation.
A brief filed by organizations representing local governments also contends that counties would suffer if they offered credits against county income tax for income earned out-of-state.
"There would be significant financial implications for counties," said Andrea Mansfield, legislative director of the Maryland Association of Counties.
According to the brief, if the Supreme Court sides with the Wynnes, estimates from the comptroller's office are that it could cost local governments $120 million in retroactive refunds, and could reduce local income tax revenues by about $50 million annually going forward.
The Bureau of Revenue Estimates says the initial cost to local governments could actually be higher - $190 million plus interest in protected claims and retroactive refunds.
Graber said if that happens, the Maryland tax bill for all residents who earn out-of-state income will go down.
"Conversely, the revenue obtained by Maryland will also go down," Graber said.
He said if the high court sides with Maryland, life will probably go on as usual as the Supreme Court has in the past left states alone to tax the income of their residents as they see fit.
The Supreme Court begins its next session Monday. This case is set to be argued Nov. 12.