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Supreme Court to consider Md. ‘piggyback’ policy

No deductions allowed in city, county levies for taxes paid out of state

In a victory for the Maryland tax collector, the Supreme Court on Tuesday agreed to consider the constitutionality of a state law that bars Marylanders from deducting from city or county taxes any tax they paid to other states on money earned there.

In a one-line order, the justices said they will hear the state’s argument that Maryland’s top court erroneously ruled last year that the law violates the federal Constitution’s Commerce Clause by discouraging Marylanders from earning money outside the state.

The Maryland Court of Appeals, in its controversial ruling, said the state’s ban on deducting tax on 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.

The Maryland court has stayed its ruling in the case, Maryland Comptroller v. Wynne, pending resolution of the state’s appeal to the justices. The high court will hear arguments during its 2014-2015 term, which begins Oct. 6, and is expected to render its decision by June 2015.

“We are pleased that the Supreme Court has recognized the significance of this issue to Maryland and its local governments,” David Paulson, a spokesman for Maryland Attorney General Douglas F. Gansler, said in a statement. “We look forward to presenting our case and having this matter decided by the Supreme Court.”

Gansler, in papers urging the Supreme Court to hear the appeal, said last October that states have broad constitutional authority to “tax all income of its residents, even income earned outside the taxing jurisdiction.”

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

But attorneys for taxpayers Brian and Karen Wynne told the justices in November that “the magnitude of an unconstitutional tax is no basis to uphold it.”

The Court of Appeals concluded correctly in January 2013 that the ban on deducting income earned out of state is a regulation on interstate commerce, the Wynnes’ attorneys added in their brief to the high court.

“We expect the court to reject Maryland’s view that states can double-tax their residents as much as they see fit,” the Wynnes’ lead attorney, Dominic F. Perella, said in a statement Tuesday.

“Maryland’s approach is unfair to people who make money in more than one state,” added Perella, of Hogan Lovells US LLP in Washington. “And it poses a serious threat to publicly traded corporations, too. If a state can double-tax an individual resident on every penny he earns in another state, no matter how much that second state has already taxed him, why wouldn’t the same be true for corporations domiciled in the state?”

Maryland’s prospect of receiving a Supreme Court hearing rose in April when the Obama administration urged the justices to hear the appeal and uphold the constitutionality of the state law.

U.S. Solicitor General Donald B. Verrilli Jr. filed the administration’s brief at the request of the Supreme Court as the justices considered whether to review the Court of Appeals’ ruling.

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 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.