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Md. challenges piggyback tax ruling

The U.S. Supreme Court signaled interest Monday in a dispute over the application of Maryland’s “piggyback tax” on residents who earn income outside the state.

The justices asked for the Obama administration’s views on the constitutionality of a Maryland law that bars state residents from deducting, from city or county taxes, any tax they paid to other states on money earned there.

The Maryland Court of Appeals last year found the state law unconstitutional, saying it violates the Commerce Clause by discouraging Marylanders from earning money outside the state.

The justices invited the U.S. solicitor general to weigh in as they consider the state’s petition to review and reverse the Court of Appeals decision.

In his brief to the Supreme Court, Maryland Attorney General Douglas F. Gansler said states have broad constitutional authority to “tax all income of its residents, even income earned outside the taxing jurisdiction.”

Gansler noted that the Court of Appeals’ decision could cost the state’s local governments between $45 million and $50 million annually. If the law is found unconstitutional, Maryland might also have to refund up to $120 million in collected taxes, he added in his October petition.

But Christopher T. Handman, attorney for taxpayers Brian and Karen Wynne, told the justices that “the magnitude of an unconstitutional tax is no basis to uphold it.”

Handman said the Court of Appeals concluded correctly last year that the ban on deducting income earned out of state is a regulation on interstate commerce.

Under the Constitution, such regulation is the province of Congress, not state legislatures, the Court of Appeals said in its 5-2 decision. In Supreme Court parlance, state laws that infringe on interstate commerce are said to violate the “dormant” Commerce Clause.

The Maryland court has stayed its ruling in the case, Maryland Comptroller v. Wynne, pending resolution of the state’s petition to the Supreme Court.

In its one-sentence order Monday, the Supreme Court stated that U.S. Solicitor General Donald B. Verrilli Jr., the federal government’s chief advocate before the high court, is “invited to file a brief in this case expressing the views of the United States.”

The solicitor general’s views are important, as the Supreme Court often defers to the Justice Department official’s opinion on whether a case presents an issue of such national importance that it merits the justices’ consideration.

Handman said he will urge the solicitor general to conclude that the U.S. government has no interest in the case, because the issue presented concerns state income tax collection and not the federal tax code.

“We don’t see how a decision in this case implicates the United States government,” said Handman, of Hogan Lovells US LLP in Washington. “It has nothing to do with the power of the federal government to tax.”

Gansler, through his spokesman David Paulson, declined to comment on any plans to meet with the solicitor general.

If the justices turn down the petition for review, the Court of Appeals’ decision will stand.

Out-of-state income

The statute at issue, Maryland Tax-General Article Section 10-703(a), allows state residents to deduct the income taxes they pay to other states from their Maryland tax. However, the state says the provision does not apply to the “piggyback” tax the state collects on behalf of local governments.

The local taxes for the 2014 tax year range from a low of 1.25 percent of taxable income in Worcester County to a high of 3.2 percent in Baltimore city and Howard, Montgomery, Prince George’s and Queen Anne’s counties, according to the Maryland comptroller’s office.

Brian and Karen Wynne challenged the law after the comptroller said they could not deduct from their Howard County tax bill the $84,550 they paid in income taxes to other states in 2006.

The Wynnes’ out-of state income was derived from Brian’s ownership share in Maxim Healthcare Services Inc., a Columbia company that operates nationwide.

The Maryland Tax Court, an administrative agency, ruled for the comptroller but was overturned in 2011 by a judge in Howard County Circuit Court.

The Court of Appeals took the case, heard argument in May 2012 and issued its holding for the Wynnes on Jan. 28, 2013.

Without the tax credit, “a taxpayer with income sources in more than one state will consistently owe more in combined state income taxes than a taxpayer with the same income sources in just the taxpayer’s home state,” Judge Robert N. McDonald wrote for the five-judge majority. “This may discourage Maryland residents from engaging in income-earning activity that touches other states.”

In dissent, Judge Clayton Greene Jr. said the state’s denial of an out-of-state tax credit for city and county taxes is not only constitutional, but also ensures fairness among neighbors, not all of whom might have earned income outside of Maryland.

“[I]f the taxpayers were allowed to pay a lesser amount of county income tax, it would have the possible absurd result of the taxpayers paying little or no local tax for services provided by the county while a neighbor with similar income, exemptions and deductions might be paying a substantial local tax to support those services,” Greene wrote.

The case is Maryland Comptroller v. Wynne, docketed in the Supreme Court as No. 13-485. The court did not give the solicitor general a deadline by which he must respond.