United States

Maryland income tax for resident owners of S corporations

How does the Wynne case impact the credit for taxes paid to other states?

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UPDATE: The U.S. Supreme Court has scheduled oral arguments in Comptroller of the Treasury v. Wynne for Nov. 12, 2014. Arguments before the Court will address whether the U.S. Constitution prohibits a state from taxing all the income of its residents by failing to provide a credit for taxes paid on income earned in other states. The implications of a U.S. Supreme Court decision either way in Wynne would be significant. A decision in favor of the taxpayer could require state and local governments, a small number of which have not historically provided credits for taxes paid to other jurisdictions, to do so. However, a decision in favor of the Comptroller of Maryland could allow states and localities to impose income taxes on their residents without providing a credit for taxes paid to any other jurisdiction and could deprive taxpayers of their dormant Commerce Clause defense against discriminatory taxes.


UPDATE: On May 27, 2014, the U.S. Supreme Court granted the petition for a writ of certiorari filed by the Comptroller of Maryland in Comptroller of the Treasury v. Wynne. The Comptroller is seeking review of the Maryland Court of Appeals’ decision that it was constitutionally permissible for the state to allow a credit against Maryland state personal income taxes for income taxes paid to other states but not provide a similar credit against county personal income taxes.


Update:  On Jan. 13, 2014, the U.S. Supreme Court did not deny certiorari as had been expected and instead requested the view of the U.S. Solicitor General as to whether the case involves an issue of interest to the federal government. 

While further action is still a possibility, affected taxpayers should file protective claims prior to the expiration of Maryland’s three-year statute of limitations.


On Jan. 28, 2013, the Maryland Court of Appeals in Maryland State Comptroller of the Treasury v. Brian Wynne, et ux affirmed the Maryland Circuit Court’s decision, holding that a Maryland resident owner of an S corporation may claim a credit against both Maryland state and county personal income taxes for income taxes paid to other states.

In its decision, the Court of Appeals concluded that only allowing a credit against state personal income taxes substantially burdened Maryland residents conducting interstate business as compared to residents participating in solely intrastate transactions. Thus, the Court of Appeals determined that the current Maryland law violated the dormant Commerce Clause of the U.S. Constitution, and therefore is unconstitutional.

In order to challenge this issue further, the Maryland Comptroller would have to request certiorari to the U.S. Supreme Court, since this taxpayer-favorable decision is from Maryland’s highest court.

The Court of Appeals decision creates a refund opportunity for Maryland residents whose tax credits for taxes paid to other states have been limited to offsetting Maryland state income tax (not county taxes). Unless the Maryland Comptroller requests certiorari to the U.S. Supreme Court, it will have no other remedies to prevent payment of refunds on this matter.

Under Maryland law, a taxpayer may file amended tax returns to request a refund for only a three-year look-back period. In order to file refund claims for prior tax years, a taxpayer must submit amended returns prior to the three-year filing limitation, or the taxpayer will lose the opportunity to amend returns for that tax year. For example, if a taxpayer filed a 2009 Maryland resident income tax return on April 15, 2010, that return must be amended by April 15, 2013.

This is applicable to Maryland resident individuals, and possibly trusts, that pay nonresident tax to states other than Maryland. It should be noted that the Wynne case was specific to a resident owner of an S corporation. However, the decision likely has application to owners of other types of pass-through entities as well.

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