Maryland residents who do business in other states can now receive full tax credit for those activities, thanks to a recent United States Supreme Court ruling.
The U.S. Supreme Court’s May 18, 2015, ruling in Comptroller of the Treasury of Maryland v. Wynne upheld the Maryland Court of Appeals decision that a resident owner of a flow-through business entity may apply the credit for income taxes paid to other states against both Maryland state-level and state-administered, county-level personal income taxes.
This ruling is significant because it is a rare move by the U.S. Supreme Court to weigh in on state tax policy and defend the rights of Maryland taxpayers who previously were only able to claim a portion of taxes paid in other jurisdictions against their home state taxes.
In the past, Marylanders who paid income taxes stemming from business operations to other jurisdictions were entitled to a credit for these taxes, but only as an offset to the state-level income tax and not for the county portion of income tax administered by the state of Maryland.
This legal saga began in 2011 when taxpayers asked the Howard County Circuit Court to intervene, contending they should be allowed a credit for taxes paid to other jurisdictions that also extends to the county portion of their income tax.
In its review of Comptroller v. Wynne, the U.S. Supreme Court applied the “internal consistency test” to determine that the tax scheme discriminated against interstate commerce by taxing individual taxpayers on all of their income without a credit for taxes paid to other states, while taxing non-residents on their income sourced to Maryland.
Examples of activities that would be eligible for such a credit include:
- Extensive traveling as an employee to jurisdictions that do not have a reciprocal withholding agreement with Maryland (such as New Jersey or New York)
- Ownership of an interest in a pass-through entity, such as an S corporation, a limited partnership or an LLC, that does business in multiple jurisdictions, including Pennsylvania
After the initial ruling of the Maryland Circuit Court in favor of the petitioner, many taxpayers filed protective appeals to keep the statute of limitations open for their returns. The Maryland statute of limitations for filing amended returns and refund claims runs three years from the date the original tax return was filed or two years from the date the tax was paid, whichever is later.
Now that the matter is resolved by the highest court, Marylanders who are partners in partnerships or shareholders in S corporations that are taxable in other jurisdictions (especially in high-tax jurisdictions like New York, New Jersey, Massachusetts and California) may wish to consider filing protective refund claims with the Maryland State Comptroller in order to preserve their rights to refunds.
RKL will continue to monitor tax law cases for outcomes and decisions that affect our clients. If you have any questions regarding this decision or want to discuss potential refund opportunities, please contact your RKL advisor or contact one of our local offices.
Contributed by Frank J. Tobias, CGFM, a principal in RKL’s Tax Services Group. He specializes in the area of multi-state planning and compliance with extensive experience in all areas of Pennsylvania taxation. Frank brings a well-rounded perspective on state and local tax issues with his experience in both public accounting and his previous professional experience overseeing the administration of PA Corporation taxes for the PA Department of Revenue.