The Maryland Court of Appeals has held that the state’s statutory interest rate for personal income tax refunds issued pursuant to the Wynne ruling was not unconstitutional.
The taxpayers were Maryland residents and part-owners of a Maryland pass-through organization who, due to the multistate operations of the business, paid income taxes to 39 other states. The taxpayers were allowed a credit against Maryland state personal income tax liability for taxes paid to other states, but the credit was not applied against the county portion of the Maryland income tax (“piggyback tax.”) After seeking judicial review, the Court of Appeals of Maryland found that the denial of the credit against the county tax for out-of-state income taxes paid to other states on pass-through income earned in those states discriminated against interstate commerce and violated the Commerce Clause of the U.S. Constitution. This decision was subsequently affirmed by the U.S. Supreme Court.
Maryland’s Legislative Response
While the case was pending in the Supreme Court, the Maryland General Assembly responded by:
amending the Maryland tax code to allow a tax credit against the county portion, as well as the state portion, of the Maryland income tax for income taxes paid in other states;
providing for the payment of refunds with respect to prior tax years as a result of the Wynne decision; and
setting the annual rate of interest paid on those tax refunds to the 3% prime rate, instead of the minimum 13% rate for certain refunds that the law otherwise provided in the tax code at that time.
Taxpayers’ Challenge to Interest Rate on Wynne Refunds
The taxpayers objected to the payment of interest on their refund at the 3% rate, and pursued an administrative appeal. While the Tax Court concluded that the Wynne interest rate was unconstitutional, the Circuit Court of Anne Arundel county reversed that decision. The taxpayers again appealed, contending that the different interest rate for Wynne refunds resulted in another violation of the dormant Commerce Clause.
With respect to discrimination of interstate commerce, the Court of Appeals highlighted the fundamental difference between a tax and the rate of interest that may be paid on a tax refund. The court found that “the rate of interest paid on tax refunds is too attenuated from interstate commerce as to substantially affect or interfere with the decision-making that directs the flow of capital or the location of transactions.” Additionally, the taxpayers did not present any evidence showing that the interest rate set for Wynne refunds would alter the competitive balance for interstate investments or industries. Therefore, the court affirmed the decision holding that the statutory interest rate for Wynne refunds does not violate the dormant Commerce Clause of the federal Constitution. Wynne v. Comptroller of Maryland, Maryland Court of Appeals, No. 12, June 5, 2020