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State’s remedy for illegal tax faces constitutional challenge

The Court of Appeals builiding in Annapolis. MF-D 9/20/04.

The Courts of Appeal building in Annapolis. (File photo)

ANNAPOLIS – Maryland’s remedy for having unconstitutionally taxed income that Marylanders earned and paid taxes on in other states also violated the federal Constitution, an attorney for the couple who won that initial legal challenge argued before the state’s top court Wednesday.

Out-of-state income earners Brian and Karen Wynne were constitutionally entitled to the same reimbursement rate for having paid the unconstitutional tax as Maryland taxpayers who overpaid their in-state taxes, attorney Sean Marotta told the Court of Appeals. However, the state’s solution was to pay the Wynnes and other out-of-state earners at a rate 10 percentage points below their in-state-earning neighbors, Marotta said.

The attorney presented his case four years after the U.S. Supreme Court struck down a Maryland law that barred Marylanders from deducting from city or county “piggyback” taxes any income tax they paid to other states on money earned there.

In its 5-4 decision, the Supreme Court said the law violated the federal Constitution’s Commerce Clause by discouraging Marylanders from earning money outside the state. As a remedy, the General Assembly enacted a law providing that those who paid the unconstitutional, non-deducted tax would be reimbursed at 3% interest, which was less than the state’s 13% interest on tax refunds due for overpayment during a calendar year.

Marotta told Maryland’s high court that the inferior remedy for out-of-state earners similarly violated the Commerce Clause by punishing those who earned money outside the state.

“The state cannot cure discrimination against interstate commerce by again discriminating against interstate commerce,” said Marotta, of Hogan Lovells US LLP in Washington. “States cannot balance their books on the backs of interstate taxpayers.”

But Judge Clayton Greene Jr. interjected that the disparate treatment of out-of-state taxpayers had only an “incidental” effect on interstate commerce. Greene, a retired judge sitting by special assignment, added that perhaps Maryland could constitutionally justify the unequal interest rates by simply showing it had a “rational basis” for setting them.

Marotta responded that “it doesn’t matter how big the discrimination is” under the Constitution. By providing a lower reimbursement rate for unconstitutionally taxed out-of-state earners, Maryland is “picking their pockets retroactively,” Marotta said.

But Assistant Maryland Attorney General Ryan R. Dietrich said the state’s remedy addressed its past wrong, did not discourage current or future interstate commerce and thus did not violate the Constitution.

“(The refund) doesn’t affect the Interstate Commerce Clause because it doesn’t affect interstate commerce,” Dietrich told the Court of Appeals.

The Wynnes’ argument that the remedy was unconstitutional won in Maryland Tax Court but lost on appeal in Anne Arundel County Circuit Court. Judge Donna M. Schaefer said in December that the 3% remedy’s retroactive application would not discourage Marylanders from working out of state in the future, as they have not been unconstitutionally taxed since the Supreme Court’s 2015 ruling.

The Wynnes, through counsel, successfully pressed the Court of Appeals to hear their appeal directly from the circuit court without it first being considered by the intermediate Court of Special Appeals. Direct review is “of significant importance to Maryland taxpayers,” as at least 440 of them have similar claims, the lawyers stated in their request to the high court.

The Court of Appeals is expected to render by Aug. 31 its decision in the case, Brian Wynne et al. v. Comptroller of Maryland, No. 12 September Term 2019.

The losing party – be it the Wynnes or the state – will have the opportunity to seek review by the Supreme Court.


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