Verrilli backs Maryland on piggyback tax

ANNAPOLIS — In a move that bodes well for the Maryland tax collector, the Obama administration is urging the U.S. Supreme Court to revive a state law designed to protect “piggyback tax” revenue the state collects on behalf of local jurisdictions.

Maryland is challenging a decision by its own top court, which last year ruled in favor of Maxim Healthcare Services Inc. founder Brian Wynne and his wife, Karen, in a dispute over their Howard County assessment.

The Court of Appeals struck down the ban on deducting, from city or county taxes, any tax paid to other states on money earned there, saying it violated the federal Constitution’s Commerce Clause by discouraging Marylanders from earning money outside the state.

Now, in papers filed with the justices, U.S. Solicitor General Donald B. Verrilli Jr. says Maryland’s highest court got it wrong.

Verrilli filed the administration’s brief on Friday at the request of the Supreme Court, as the justices consider a petition for review filed by Maryland Attorney General Douglas F. Gansler.

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. The justices have not said when they will vote on Gansler’s petition for certiorari.

In its 5-2 ruling, the Court of Appeals said Maryland’s ban on deducting income earned out of state is a regulation on interstate commerce — a power reserved to the U.S. Congress under the Constitution.

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

Costly consequences

Verrilli’s brief bolsters the state’s position.

The Supreme Court “has long recognized that states have plenary authority to tax the entire income, wherever earned, of their own residents, who directly benefit from the services funded by income taxes and who collectively have the political power to achieve the repeal of any undesirable tax laws,” Verrilli wrote. “Although states often choose to grant tax credits to their residents for income taxes paid in other states, nothing in the Commerce Clause compels a state to offer such credits or otherwise defer to other states in the taxation of its own residents’ income.”

The Court of Appeals’ decision “has significant financial consequences for Maryland; may lead to challenges to similar tax schemes in other jurisdictions; and is inconsistent with statements made by the highest courts in other states,” Verrilli added.

Gansler, in his October brief to the Supreme Court, said states have broad constitutional authority to “tax all income of its residents, even income earned outside the taxing jurisdiction.”

Gansler added 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 have to refund up to $120 million in collected taxes, he added in his petition for review and reversal

But Christopher T. Handman, attorney for the Wynnes, told the justices in his brief that “the magnitude of an unconstitutional tax is no basis to uphold it.”

The Court of Appeals concluded correctly last year that the ban on deducting income earned out of state is a regulation on interstate commerce, added Handman, of Hogan Lovells in Washington, D.C.

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

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 Maxim, 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 ruled for the Wynnes on Jan. 28, 2013.

The case is Maryland Comptroller v. Wynne, docketed in the Supreme Court as No. 13-485.