Playing to Wynne: Supreme Court’s Recent Ruling on State Credits for Taxes Paid to Other Jurisdictions

Playing to Wynne: Supreme Court’s Recent Ruling on State Credits for Taxes Paid to Other Jurisdictions

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State and local taxes, to the chagrin of an increasingly large number of taxpayers and practitioners, have become quite complex. Each state and many localities have separate taxing regimes with different rules and intricacies. State credits for taxes paid is the constitutional glue that holds these separate regimes together for multi-state taxpayers. A recent U.S. Supreme Court ruling clarified the scope of what taxes may be credited.

Maryland, like most states, permits resident taxpayers to take a credit for taxes paid to other jurisdictions to offset the state’s personal income tax. The Maryland statute, however, did not provide a credit against county income taxes, meaning that Maryland resident taxpayers would be forced to pay tax on county income at the county level and again at the state level. No credit was allowed to provide relief from this double taxation.

Brian and Karen Wynne are Maryland residents and held shares in Maxim Healthcare Services, Inc, an S-corp, which filed in 39 states in 2006. Maxim allocated income, expenses, and taxes paid to the Wynnes. They filed a Maryland resident tax return claiming credits for taxes paid for both state and county taxes. The Maryland State Comptroller partially denied the claim for credits for taxes and assessed a deficiency. Specifically, the Comptroller allowed a credit for State taxes paid, but not for County taxes paid, in accordance with the Maryland Statute.

The taxpayer protested the assessment and argued that the statute denying credit for County income taxes violated the Commerce Clause. The case was argued up to the United States Supreme Court, where the Court held the Maryland Statute violated the Commerce Clause and was unconstitutional.

The majority opinion, written by Justice Alito, found that the statute violated the internal consistency rule, because if a similar rule was applied by all states, the result would be double taxation. The Court also found that the statute violated the Complete Auto four part test because it taxed a transaction more heavily when it crossed state lines than one that is conducted entirely within Maryland.

Taxpayers who filed in Maryland and did not receive a credit for County income taxes should consider filing an amended return, if the statute of limitations has not yet expired. A refund may also be applicable for other states such as New York and New Jersey, but guidance on this issue is pending, and taxpayers should not claim a refund until an announcement on this issue is made. This holding may generally apply to any county or other local jurisdiction taxes paid, however, it will not change the general rule for credits for income taxes paid.

If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at [email protected].

Alex Fishbane Alexander Fishbane, Esq., LLM
[email protected]


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