The Howard County Circuit Court recently struck down, as unconstitutional, Maryland’s credit mechanism for personal income taxes paid to other states insofar as that credit does not extend to income taxes paid to Maryland localities. Taxpayers who were denied this credit against Maryland local income taxes may eventually be due refunds. 

The Maryland personal income tax is composed of an amount payable to the state and another portion payable to a locality. Both the state portion and the local portion of the tax are collected by the Maryland Comptroller. As do most states, Maryland allows residents a credit against personal income for taxes paid to other states. However, the Maryland credit for taxes paid to other states is not allowed against the local portion of the income tax.

A Maryland couple challenged this credit scheme, which disallowed a credit against their county income tax, as a violation of the Commerce Clause of the U.S. Constitution. In a lengthy opinion issued on June 29, 2011, Judge Becker of the Howard County Circuit Court agreed. The state is certain to appeal and the final determination of the case is not likely to be known until 2012 or 2013. 

In the meantime, the period for filing refund claims is generally three years from the date a timely Maryland return (including extensions) was filed.  Therefore, refund claims are foreclosed for all tax years before 2007 and for any return that was filed without extension for 2007 (i.e., filed on or before April 15, 2008).  However, taxpayers who extended the 2007 return may still have time to file protective refund claims. Consequently, immediate action is required to file timely amended Maryland returns for such protective claims. 

Aronson LLC can assist in filing these protective claims or with answers to questions concerning the Court’s decision. Please contact Horace Lamb, Jack Koniszewski or Henry Chiwaya at 301.231.6200.