A divided U.S. Supreme Court ruled that Maryland’s income tax law is unconstitutional because it does not provide a full tax credit to residents for income tax paid outside the state, a ruling likely to cost Maryland counties and localities across the country millions of dollars in revenue. A Howard County couple challenged the law, arguing that to pay income tax in other states and then pay some of it again in Maryland amounted to illegal double taxation. The Supreme Court agreed, finding that Maryland’s law improperly penalized interstate commerce when the Court issued its 5-4 decision on May 18, 2015, holding that the state’s failure to allow resident individuals a credit for the county income tax against taxes paid to other states on pass-through income is unconstitutional because it is inherently discriminatory.
This victory allows taxpayers to claim a refund for all open years, generally 2012 through 2014. Since Maryland has not yet decided whether to appeal the decision and the State is not yet set up to process the expanded credit, taxpayers are in a wait and see position until filing guidelines are issued.
The ruling is also likely to affect thousands of other cities, counties and states with similar tax laws, including New York, Indiana, and Pennsylvania.