Over the past few weeks refunds have been appearing in the mail, signaling that yet another tax season has come full circle. However, due to a recent Supreme Court ruling, Maryland taxpayers may be eligible for yet another refund.
To understand the Court’s ruling, it is important to know that Maryland’s personal income tax structure consists of two arms: the state and local levels. In Comptroller of the Treasury v. Wynne, the Supreme Court determined that Marylanders who earn an income outside of the state have been subjected to double taxation—first in the taxes paid to the state in which the income was earned, and, for the same non-Maryland income, again at the Maryland local level. Although the state rate grants taxpayers a credit for the taxes paid to the state in which the income was generated, there is no such credit at the local level.
In a split decision, the Court voted 5-4 that Maryland’s current structure forced Marylanders engaged in interstate commerce to make a decision: either pay twice the taxes on the same income, or confine one’s business to in-state traffic only. The choice created a discrimination against interstate commerce, which contributed to the majority’s finding that the part of the Maryland tax structure that permits the double taxation is invalid. The Court found that the current tax structure resulted in the imposition of a tariff, having the effect of narrowing trade in intrastate markets.
The majority of the Court found that the current tax scheme in Maryland violated the dormant Commerce Clause of the Constitution; by creating an economic disadvantage to engaging in interstate commerce, the tax structure practiced in Maryland persuaded taxpayers to keep their business in-state, as opposed to expanding into interstate markets.
In response to this decision, the State has begun processing refunds for those Marylanders eligible for a return on the double-paid taxes. Following procedures outlined in House Bill 72, the Comptroller’s office has, and continues, to accept and review amended returns. For those who were found to pay a double tax, refund checks will be issued. The refunds will also include 3% interest.
Like all matters heard by the Supreme Court, the arguments and facts supporting Comptroller of the Treasury v. Wynne have been in the making for many years. In 2013 the Maryland attorney general’s office first requested that the Supreme Court review a decision made in the case by the Maryland Court of Appeals. At that time, it was estimated that a decision to invalidate the local tax provision that permitted the double taxation of out-of-state generated income could cost Maryland counties $50 million per year. Now, two years and one Supreme Court decision later, we will begin to see the real effect of the invalidation of this part of the local tax.
Passed as part of the 2015 Maryland General Assembly budget reconciliation bill, House Bill 72, requires all amended returns to be filed within three years of the date of the original return.