Maryland upholds lower Wynne refunds interest rate


Jarryd Ritter
Metro DC - Arlington
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Matthew Libeg
Metro DC - Arlington
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Charmaine Matheson
Metro DC - Arlington
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Patrick Skeehan
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On June 5, 2020, the Maryland Court of Appeals upheld a Maryland law imposing a lower interest rate for unpaid refunds resulting from the U.S. Supreme Court’s 2015 decision in Comptroller of Maryland v. Wynne.1 In affirming the trial court, the Court found that the law did not implicate the dormant Commerce Clause of the U.S. Constitution or discriminate against interstate commerce. The Court determined that the Maryland legislature was warranted in setting a substantially lower interest rate paid on tax refunds from the Wynne decision than the prevailing interest rate tied to other tax types.

Background In 2015, the U.S. Supreme Court ruled in the Wynne case that Maryland’s lack of a resident credit for taxes paid to other states against a local personal income tax was unconstitutional because it discriminated against interstate commerce.2 Taxpayers Brian and Karen Wynne were Maryland residents and held an ownership interest in a federal S corporation with multistate operations. In 2006, the S corporation filed state income tax returns in 39 states, including Maryland. The Wynnes earned income passed through to them from the S corporation and paid taxes to various states according to their pro rata share. On their 2006 Maryland resident tax return, they claimed a credit for taxes paid to other states. The Maryland Comptroller allowed the Wynnes to apply the credit only against the state portion of their personal income tax liability, disallowing the credit against the county portion and resulting in the issuance of an assessment.3

After appeals to the Maryland Tax Court, the state circuit court and the Maryland Court of Appeals, the U.S. Supreme Court held that the Maryland tax system impermissibly exposed taxpayers to the possibility of double taxation. The Court also found that the state’s tax structure violated the fair apportionment requirement of the dormant Commerce Clause because it was not internally consistent.4 In other words, if every state had adopted Maryland’s tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce. For these reasons, the Court concluded that the state’s tax system was inherently discriminatory and operated as a tariff.

The Court did not provide a specific remedy to taxpayers to cure the constitutionality of Maryland’s tax system. Instead, the Court suggested that Maryland could solve its problem by granting a credit against the county portion of the personal income tax for taxes paid to other states. Therefore, the state was left with several options to bring its tax system into compliance. While the case was pending in the U.S. Supreme Court, the Maryland legislature responded by enacting the Budget Reconciliation and Financing Act of 2014 (2014 BRFA).5 Anticipating that the state would owe approximately $190 million in refunds and $51 million in interest at the statutory rate if the U.S. Supreme Court ruled in favor of the taxpayers, the legislature drafted the law to provide that the Comptroller would set the annual interest rate for income tax refunds at the average prime rate of interest quoted by commercial banks to large businesses during Maryland’s 2015 fiscal year.6 This rate was substantially lower than the 13% rate that Maryland law otherwise provided at the time.7

The following year, with the Wynne case still pending before the Court, Maryland enacted the Budget Reconciliation and Financing Act of 2015 (2015 BRFA), amending the income tax law to provide a credit against the county income tax for taxes paid to other states, contingent on the Court’s decision in Wynne.8 The legislation also established a mechanism for the Comptroller to pay out refunds to impacted taxpayers for prior tax years resulting from the Wynne decision.9 Following the Court’s decision invalidating the income tax law, the Comptroller issued tax refunds to affected taxpayers for open tax years and computed interest on those refunds at an annual rate of 3%, in accordance with the 2014 BRFA.

Procedural history The Wynnes challenged the payment of interest on their tax refund at the 3% rate for the 2006 tax year. The Comptroller rejected their appeal, and the Wynnes sought relief in the Maryland Tax Court. In reversing the Comptroller, the Tax Court concluded that Section 16 of the 2014 BRFA was unconstitutional, stating that it was following the same logic as the U.S. Supreme Court in the first Wynne decision. The Comptroller appealed the decision to Circuit Court for Anne Arundel County, which reversed the Tax Court’s decision, finding that the 2014 BRFA did not violate the dormant Commerce Clause. The Wynnes appealed the decision to the Maryland Court of Appeals.

Court of Appeals decision In affirming the state circuit court, the Court of Appeals concluded that the dormant Commerce Clause did not require the tax refunds be paid to the Wynnes at the 13% annual interest rate. The Court reviewed the legislative intent behind the 2014 BRFA, which was to provide a remedy for the constitutional violation found by the U.S. Supreme Court in the first Wynne decision. The Maryland legislature retroactively provided a tax credit against the county portion of the personal income tax for taxes paid to other states, resulting in the payment of refunds. In choosing to provide refunds, the Court noted, the legislature had a “legitimate interest in sound fiscal planning” by limiting that refund in various ways.10 To accomplish this, the legislature directed the Comptroller to pay out the refunds pegged at an interest rate at the 3% prime rate instead of the standard 13% interest rate. In analyzing the constitutionality of the 2014 BRFA, the court engaged in a two-part analysis, determining whether the law regulated interstate commerce, and if so, whether it discriminated against interstate commerce.

2014 BRFA does not regulate interstate commerce In reviewing the U.S. Supreme Court’s Commerce Clause jurisprudence, the Court of Appeals noted that state regulation of activities via congressional action typically implicates the dormant Commerce Clause. For example, a variety of state laws regulating certain industries – such as milk pricing, solid waste disposal or apple labeling – were found to affect the channels of interstate commerce.11 From a tax perspective, favorable tax treatment of in-state entities were also found to affect interstate commerce in a variety of contexts.12 In contrast, this case concerned the rate of interest paid on a tax refund provided as a remedy for a past constitutional violation. The Court noted that there is a “fundamental difference” between a tax and the rate of interest that is paid on a tax refund. While a tax can operate similar to a tariff and directly impact interstate commerce, the Court reasoned, the rate of interest on a tax refund is instead determined after a business decision affecting interstate commerce that generated the previously taxed income. For this reason, the Court concluded that the interest rate established for tax refunds does not implicate interstate commerce. Despite this conclusion, the Court proceeded to address the question of whether the 2014 BRFA discriminates against interstate commerce.

2014 BRFA does not discriminate against interstate commerce The Wynnes argued that in passing the 2014 BRFA, the Maryland legislature could have adopted alternative measures to address the state’s fiscal situation in reaching a balanced budget. Instead, they argued, the legislature chose to provide the Wynne claimants with a “special, lower interest rate that no taxpayer engaged in intrastate commerce receives.” However, the Court disagreed that the lower interest rate tied to the Wynne refunds disadvantaged out-of-state economic interests. In the Court’s view, the Wynnes did not provide any evidence that the 3% prime interest rate would alter the competitive balance for interstate investment, or any other interstate industry. Pointing out that many taxpayers receive no interest on a tax refund, the Court found that the Wynnes failed to demonstrate that taxpayers engaging in intrastate commerce received interest on a tax refund at a greater rate than the one received by the Wynnes.

The Wynnes also argued that the lower interest rate tied to Wynne refunds disadvantaged taxpayers involved in interstate commerce, thereby discouraging out-of-state investment by Maryland taxpayers. In response, the Court noted that some Maryland taxpayers paying income tax to another state based on income generated in that state are not engaged in business activities in other states. Such taxpayers also received a refund based on the retroactive allowance of a credit against the county portion of the Maryland income tax. Although the Wynnes contended that these examples substantially affected interstate commerce, the court found that they attempted to “stretch the concept” to encompass any transaction involving a Maryland resident receiving or paying money in another state. Accordingly, the Court determined that the law did not discriminate against interstate commerce. Concluding that the remedial nature of the 2014 BRFA did not violate the dormant Commerce Clause, the Court affirmed the circuit court’s decision.

Commentary It was expected that many high-income taxpayers impacted by the U.S. Supreme Court decision in Wynne would challenge Maryland’s reduced interest rate tied to Wynne refunds as enacted in the 2014 BRFA. As the Court of Appeals noted in its opinion, the Wynnes would have received an additional $14,000 in interest based on their refund for the 2006 tax year had the interest been calculated at the standard 13% rate. Despite the Maryland legislature’s decision to preemptively change the interest rate on Wynne refunds (in some cases for tax years that had long passed), the Court of Appeals’ decision is not altogether unexpected. Taxpayers often bear a high burden to show discrimination against interstate commerce in order to prove a violation of the dormant Commerce Clause.

The Court of Appeals had a difficult time justifying an additional windfall for the Wynnes and by extension other similarly situated taxpayers. As an example, the Wynnes had already received a refund of approximately $33,000 in tax plus interest for the 2006 tax year, as a result of the original Wynne decision. Maryland enacted the 2014 BRFA as a means to balance the state budget and save an estimated $38.4 million in interest that would have otherwise been paid out with retroactive Wynne refunds at a 13% annual interest rate.13 In weighing the constitutional arguments of both the taxpayers and the Comptroller, the Court essentially found that the state’s fiscal interests took precedence over the disparate treatment on the payment of interest on Wynne refunds.

1 Wynne v. Comptroller of Maryland, No. C-02-CV-18-001788, Maryland Court of Appeals, June 5, 2020.
2 Comptroller of Maryland v. Wynne, 575 U.S. 542 (2015). For a detailed discussion of the Wynne decision, see GT SALT Alert: U.S. Supreme Court Holds Lack of County Personal Income Tax Credit for Taxes Paid to Other States Violates Commerce Clause.
3 Maryland’s personal income tax is comprised of two components: a state income tax and a county income tax, which varies according to the county of the taxpayer’s residence. MD. CODE ANN., TAX-GEN. § 10-101 et seq. Under prior law, 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. FORMER MD. CODE ANN., TAX-GEN. § 10-703(a).
4 State tax regimes are typically reviewed under the four-prong test prescribed by the U.S. Supreme Court in Complete Auto Transit v. Brady. The test asks whether a tax is applied to an activity (i) having substantial nexus with the taxing state; (ii) is fairly apportioned; (iii) does not discriminate against interstate commerce; and (iv) is fairly related to the services provided by the state. 430 U.S. 274 (1977). To determine whether a tax is fairly apportioned, courts have applied the internal consistency test, which asks whether the adoption of the same tax scheme by all states would place interstate commerce at a disadvantage as compared with intrastate commerce. See Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995).
5 Ch. 464, Laws 2014.
6 Ch. 464, § 16, Laws 2014.
7 MD. CODE ANN., TAX-GEN. § 13-604(b).
8 Ch. 489, §§ 4, 26, Laws 2015.
9 Ch. 489, § 27, Laws 2015.
10 See McKesson Corp. v. Division of Alcoholic Beverages, 496 U.S. 18 (1990); Fulton Corp. v. Faulkner, 516 U.S. 325 (1996).
11 See West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994); Or. Waste System, Inc. v. Or. Department of Environmental Quality, 511 U.S. 93 (1994); Hunt v. Wash. State Apple Advertising Commission, 432 U.S. 333 (1977).
12 See Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 383 (1994); New Energy Co v. Limbach, 486 U.S. 269 (1988); Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984); Armco, Inc. v. Hardesty, 467 U.S. 638 (1984).
13 S.B. 172 Revised Fiscal and Policy Note, Md. Department of Legislative Services, June 17, 2014.

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