Background on Wynne v. Comptroller of Maryland
In the landmark Wynne decision, the taxpayers were Maryland residents and part-owners of a Maryland pass-through organization. Due to the multistate operation of their business, the taxpayers paid income taxes to 39 other states.
The taxpayers were allowed a credit against Maryland state personal income tax liability for taxes paid to other states. However, the credit was not applied against the county portion of the Maryland income tax (the “piggyback tax.”) The Maryland Court of Appeals found that the denial of the credit against the county tax discriminated against interstate commerce and violated the Commerce Clause of the U.S. Constitution. This decision was subsequently affirmed by the U.S. Supreme Court.
Maryland’s Legislative Response
While the case was pending in the Supreme Court, the Maryland General Assembly responded by:
- amending the tax code to allow a credit for taxes paid in other states against the county portion of the income tax;
- providing for the payment of refunds for prior tax years as a result of the Wynne decision; and
- setting the annual interest rate paid on those tax refunds at the 3% prime rate, instead of the 13% rate for certain refunds that the law otherwise provided at that time.
Taxpayers’ Challenge to Interest Rate on Wynne Refunds
The taxpayers objected to the 3% interest rate on their refund payment. Though the Tax Court concluded that the Wynne interest rate was unconstitutional, the Circuit Court of Anne Arundel county reversed. The taxpayers appealed, contending that the lower interest rate for Wynne refunds resulted in another violation of the dormant Commerce Clause.
Court of Appeals’ Analysis
The Court of Appeals highlighted the fundamental difference between a tax and the rate of interest on tax refunds. The court found that the interest rate on tax refunds is too far removed from the issue of interstate commerce to impact business location decisions. Additionally, the taxpayers did not present any evidence showing that the lower interest rate would alter the competitive balance for interstate investments or industries.
Further, the interest rate provision was adopted as part of a budget reconciliation bill. The court found that this was part of the Legislature’s constitutional responsibility to maintain a balanced budget. Assigning a lower interest rate (one exceeding the inflation rate) to Wynne refunds ensured fair taxpayer compensation while maintaining fiscal integrity. Therefore, the court affirmed and held that the statutory interest rate for Wynne refunds does not violate the dormant Commerce Clause of the U.S. Constitution.
By Amber Harker, J.D.