Last Monday, the Supreme Court struck down Maryland’s practice of double-taxing residents who pay income taxes in other states.
The Court ruled 5-4 that the tax law is unconstitutional due to the fact that it does not provide a full tax credit to residents for income tax paid outside of the state. The ruling will affect about 55,000 taxpayers.
Maryland’s income tax law had been withholding a credit on the county segment of the state income tax, which could be as high as 3.2 percent, lead to residents with out-of-state income to experience double taxation. The Justices ruled that this violated the commerce clause of the Constitution due to its potential to discourage individuals from doing business across state lines.
“Maryland’s tax scheme is inherently discriminatory and operates as a tariff,” the court wrote in its summary, “which is fatal because tariffs are ‘the paradigmatic example of a law discriminating against interstate commerce.’ “
Income from other states is usually taxed both where the money is made and where taxpayers live, in most states, but in order to guard against double taxation, states usually give residents a full credit for income taxes paid on out-of-state earnings.
Maryland’s residents have been able to deduct income taxes paid to other states from their Maryland income tax, but the deduction could not be applied to a “piggyback” tax that is collected by the state for counties and the city of Baltimore.
Those who tried to claim the credit on their county income tax returns between 2006 and 2014 are likely to be eligible for refunds, which officials estimate at about $200 million with interest. The refunds will be provided from the state’s income tax reserve fund.
Comptroller of the Treasury of Maryland v. Wynne’s ruling will potentially cost states with similar tax laws, including New York, Indiana, and Pennsylvania, millions of dollars.
Chief Justice John G. Roberts Jr. and Justices Samuel A. Alito Jr Anthony M. Kennedy, Stephen G. Breyer and Sonia Soto¬mayor all voted against Maryland, while Justices Ruth Bader Ginsburg, Antonin Scalia, Elena Kagan and Clarence Thomas dissented