Tax Credit Issue Picked Up by Supreme Court

WASHINGTON (CN) - The Supreme Court agreed Tuesday to determine whether it violates the dormant commerce clause for Maryland not to credit a certain tax liability.

Maryland's county income tax takes no account of a credit that the state allows when an individual's state tax liability for income taxes paid to other states based on the income earned in those states.

Brian and Karen Wynne, a married couple with five children living in Howard County, challenged the law with regard to income that they incurred through Brian's role as an 2.4 percent owner of Maxim Healthcare Services.

After Maxim became a subchapter S corporation, its income was passed to owners like Wynne for federal income tax purposes.

The Wynnes reported the corporation's income on both their federal and 2006 Maryland tax return.

Maxim had filed state income tax returns in 39 states that year, and it allocated to each shareholder a pro rata share of taxes paid to the various states.

The Wynnes claimed their pro rata share of such income taxes paid to other states as a credit.

They appealed when the comptroller issued them an assessment for a purported deficiency in Maryland taxes that the Wynnes paid based on a change in the computation of the local tax and revision of the credit for taxes paid to other states on the Wynnes' 2006 Maryland Form 502.

Both the comptroller's office and the tax court rejected challenges by the Wynnes, but the Howard County Circuit Court reversed in 2011.

It said the tax court had to give "an appropriate credit for out-of-state income taxes paid" on Maxim's income, and the Maryland Court of Appeals affirmed, 5-2, in 2013.

"The failure of the Maryland income tax law to allow a credit against the county tax for a Maryland resident taxpayer with respect to pass-through income of an S corporation that arises from activities in another state and that is taxed in that state violates the dormant Commerce Clause of the federal Constitution," the ruling states.

Though the Wynnes said the court should strike down the Maryland county income tax,

the credit, or some part of the Maryland tax scheme, the majority emphasized that that it found no issue with the county income tax, the credit, or Maryland income tax law generally.

"What is unconstitutional is the application - or lack thereof - of the credit to the county income tax," the ruling concludes.

Citing its 2006 decision in Comptroller v. Blanton, the court said credits previously applied to the county income tax in these circumstances.

"The county income tax was only eliminated from the computation and application of the credit by a 1975 amendment of the tax code," the ruling states. "It is that amendment, when applied to the particular circumstances of taxpayers like the Wynnes, that contravenes the Constitution. On remand from the Circuit Court, the Tax Court should recalculate the Wynnes' tax liability in a manner consistent with this opinion."

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