Maryland Tax Court rejects lower interest rates on refunds


Eric Cheek
Metro DC - Arlington
T +1 703 637 4201 

Sonia Shaikh
Metro DC - Arlington
T +1 703 637 2616 

Jamie C. Yesnowitz
Washington, DC
T +1 202 521 1504 

Chuck Jones
T +1 312 602 8517 

Lori Stolly
T +1 513 345 4540 
On May 23, 2018, the Maryland Tax Court ruled that providing lower interest rates for refunds related to the U.S. Supreme Court’s decision in Comptroller of the Treasury of Maryland v. Wynne1 than for other refunds is unconstitutional.2 The Tax Court agreed with the petitioner’s primary argument, that a lower interest rate directly violates the dormant Commerce Clause, following the “exact same logic” as the U.S. Supreme Court in its 2015 decision.3

Background The original Wynne case arose from a challenge to the Maryland individual income tax system, which imposes a two-tiered structure, separating its state level tax4 from the state-administered county level tax.5 In practice, Maryland residents were only allowed to use the credit for taxes paid to other states to offset liability at the state level, not the county level.6 Thus, a Maryland taxpayer owning a multistate business with a credit for taxes paid to other states exceeding the taxpayer’s state-level tax, did not receive the benefit of the excess credit, resulting in an economic disadvantage against similarly situated taxpayers owning a business only doing business in Maryland. 

In Wynne, the taxpayers challenged Maryland’s limitation on credits, applying their excess credits to offset their county-level liability. Upon receiving an assessment from the Comptroller, the Wynnes filed an administrative appeal, which was denied by the Maryland Comptroller’s Hearings and Appeals Section. The Maryland Tax Court affirmed the Comptroller’s decision. However, the Circuit Court for Howard County reversed the assessment, holding that Maryland’s tax system violated the dormant Commerce Clause. This judgment was affirmed by the Maryland Court of Appeals.

In affirming the Maryland Court of Appeals’ decision, the U.S. Supreme Court found that Maryland’s disallowance of credit for taxes paid to other states against the county-level tax violated the dormant Commerce Clause, which prohibits states from imposing a tax that “discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of ‘multiple taxation.’”7 The Court cited three of its prior rulings for support,8 all of which were gross receipts tax cases that ruled in favor of the taxpayer, with the reasoning that the taxes were unapportioned and resulted in multiple taxation for taxpayers that were engaged in an interstate business. 

The Court also applied the internal consistency test, a test developed in the Court’s dormant Commerce Clause jurisprudence.9 The test “looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.”10 The Court explained that by following this hypothetical assumption, the effect of the tax at issue is isolated, and allows for a clearer analysis. Upon using a hypothetical example, the Court held that the Maryland tax system failed the internal consistency test. 

Legislative action to change interest rate for Wynne refunds In anticipating a potential Supreme Court decision that could adversely impact the state, prior to the Wynne ruling, the Maryland legislature enacted Section 16 of the Budget Reconciliation and Financing Act of 2014.11 This provision retroactively lowered the interest rate for refunds owed to Maryland taxpayers that were related to the Supreme Court’s Wynne decision. Before its enactment, interest on refunds accrued at the greater of 13% or the Federal Reserve Bank’s average prime interest rate plus three percentage points, subject to certain exceptions.12 However, the interest rate for Wynne-specific refunds was reset to 3.25%, representing the average prime rate of interest quoted by commercial banks to large businesses during the 2015 fiscal year.

Litigation challenging lower interest rate succeeds Impacted taxpayers proceeded to dispute the reduced interest rate in two separate venues: the Maryland Tax Court13 and in a $38 million class action suit filed in the Circuit Court for Baltimore City.14 The latter case was dismissed earlier this year, with the Circuit Court holding that the plaintiffs were required to first exhaust their administrative remedies by filing suit in the Maryland Tax Court. 

With respect to the Maryland Tax Court litigation, it only took one page for the Tax Court to determine that the lower interest rates imposed by the state’s targeted provision were unconstitutional. The Tax Court aligned itself with the Supreme Court’s reasoning by summarily holding that, “[s]ince the Budget Reconciliation Act of 2014 is determined to be unconstitutional, there is no reason to address any of the other rationales advanced by the Petitioner to invalidate this [reduction of interest paid on Wynne-related refunds] Statute.”

Commentary Maryland adopted the reduced interest rate provision on Wynne refunds as a means to save significant amounts of money in the event that it lost the Wynne case. Interestingly, the Maryland legislature considered legislation in this year’s legislative session to repeal the provision.15 While the bill never moved past the Senate Budget and Taxation Committee, a Maryland legislative fiscal and policy note on the bill was released, showing that adoption of the bill would cost Maryland localities nearly $30 million in the next six fiscal years.16
To the extent that the Tax Court’s latest decision is not appealed, it remains to be seen whether the legislature’s estimate verifies. Of course, there is a distinct possibility that the Comptroller appeals the decision. If so, the additional interest on refunds would become even more substantial if the Tax Court’s decision is ultimately upheld by a higher court.

  The decision is sure to receive attention from other jurisdictions that have significant state and local components such as New York, Ohio and Pennsylvania. More generally, states that find themselves considering legislation that would limit interest on certain types of refund claims may be more hesitant to proceed given that such procedural legislation apparently can be stricken via constitutional challenge, just like the substantive legislation that gave rise to the cause of action in the first place. 

1 135 S. Ct. 1787 (2015).
2 Wynne v. Comptroller of Maryland, Maryland Tax Court, No. 16-IN-OO-0216, May 23, 2018.
3 For a discussion of the U.S. Supreme Court’s decision, see GT SALT Alert: U.S. Supreme Court Holds Lack of County Personal Income Tax Credits for Taxes Paid to Other States Violates Commerce Clause.
4 MD. CODE ANN. § 10-703.
5 MD. CODE ANN. §§ 10-103; 10-106.
6 MD. CODE ANN. § 10-105(a).
7 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959) (citations omitted).
8 J.D. Adams Manufacturing Co. v. Storen, 304 U.S. 307 (1938); Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939); Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653 (1948).
9 See American Trucking Assns., Inc. v. Michigan Pub. Serv. Comm’n, 545 U.S. 429 (2005); Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995); Goldberg v. Sweet, 488 U.S. 252 (1989); American Trucking Assns., Inc. v. Scheiner, 483 U.S. 266 (1987); Tyler Pipe Industries v. Department of Revenue, 483 U.S. 232 (1987); Armco, Inc. v. Hardesty, 467 U.S. 638 (1984); Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983).
10 Jefferson Lines, Inc., 514 U.S. 175.
11 S.B. 172/H.B. 162, Laws 2014.
12 MD. CODE ANN. § 13-604(b).
13 Wynne v. Comptroller of Maryland, Maryland Tax Court, No. 16-IN-OO-0216, May 23, 2018.
14 Holzheid et al. v. Comptroller of the Treasury of Maryland, Baltimore City Circuit Court, No. 24-C-15-005700, filed Nov. 13, 2015.
15 S.B. 193, introduced on Jan. 17, 2018.
16 S.B. 193: Fiscal and Policy Note, Maryland Department of Legislative Services.

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.