The state is asking Maryland’s highest court to reconsider its ruling in a “double taxation” case that could potentially cost Montgomery and Frederick counties millions of dollars in tax revenue.
The Maryland Court of Appeals ruled in late January that it’s unconstitutional for counties in the state to not credit residents for income taxes paid in other states, saying that amounts to double taxation on residents. Maryland allows the out-of-state credit for its portion of income taxes, but not for the county portion.
The ruling would let residents amend their tax returns in 2009, 2010 and 2011 to apply for the county credits for those years.
In the state’s appeal filed Feb. 27, Maryland Attorney General Douglas F. Gansler (D) asked the court reconsider its ruling, and if it did not, make the judgment only apply to successive years for non-parties of the lawsuit.
Gansler also requested the court stay enforcement of the judgment “pending possible legislative action and an anticipated further appeal,” if it did not reconsider its ruling.
The ruling affects many small business people in Maryland who might be self-employed or operate S-corporations — businesses that pass income and losses to their shareholders for federal tax purposes.
More of these business people are in Montgomery than in other counties, according to an analysis filed with the court by the state in late February. If all affected residents were allowed to take the credit between 2009 and 2011 and amended their returns, Montgomery would face having to refund $72.5 million during those three years, according to the analysis.
The situation was not caused by anything the counties did, but there are a lot of discussions going on and a lot of uncertainty, said Patrick Lacefield, a spokesman for Montgomery County who met with county attorneys Thursday to review the case.
“There are a lot of things that are unclear, such as whether the decision will be appealed and how the Comptroller’s Office will handle it,” Lacefield said.
If the economy continues to recover, the effect on local taxes statewide would be between $45 million and $50 million annually, Andrew Schaufele, director of the Bureau of Revenue Estimates with the Maryland Comptroller’s Office, said in an affidavit filed with the court.
Baltimore County, which has the second largest effect in Maryland, faces having to refund as much as $13.7 million for the three-year period. Frederick County faces returning $2.7 million in tax money for those three years, according to state estimates.
Frederick County Attorney John S. Mathias said he is aware of the case and potential costs, but he declined to comment further.
The case dates to 2006, when Maryland resident Brian Wynne owned 2.4 percent of the stock of Maxim Healthcare Services of Columbia, which provides medical staffing, home health and wellness services through more than 360 offices nationwide.
Brian and Karen Wynne claimed a credit on their 2006 Maryland income-tax form for income taxes paid to other states. The Maryland Comptroller’s Office changed the amount of the local income tax paid to Howard County by the Wynnes and issued an assessment, which the Wynnes appealed.
In 2008, an appeals process through the Comptroller’s Office affirmed the assessment. The Wynnes then appealed to the Maryland Tax Court, which denied the appeal in 2009 and affirmed the original assessment.
The Wynnes then filed for a hearing in Howard County Circuit Court, which, in 2011, reversed the Tax Court’s decision. The state appealed, sending the case before the Maryland Court of Appeals.