Good news!!!!!!  (I love reporting good news!)

If you live in Maryland, Pennsylvania, New York (certain locations), or Indiana- or you have business entities that operate in those states- you are about to save a chunk of change.   You see these states impose surcharges on their residents that are officially taxes for the county or city of residence.  (I remember the first time a client yelled at me saying their Maryland taxes were only $ 5000, why did they have to send in $ 7000?   It’s because their county had an additional surtax, one that was paid to the state.)

Now, if you operate in those states and have a business, you can obtain a full credit for these surtaxes imposed on your income.  The US Supreme Court ruled on the Maryland case, but it applies to the other states.

Maryland hits its residents (and business residents, as in this case) with a state tax and a county surcharge on worldwide income, as you can see from the diagram above.  And, up until a few days ago, no credits for taxes paid to other states could be applied against the county tax due- only the state portion.   (Non-residents who have Maryland sources also pay a state income tax- but they also pay a special non-resident tax instead of the county tax.)

S-based entities are pass-through businesses- which means the income from the business passes through to the stockholders who own the company.  As such, the business profits are subject to personal income taxes (and the county surcharge in Maryland).  Brian and Karen Wynne (owners of Maxim Healthcare Services) knew that the credit due for taxes to other states applied to all the state taxes and refused to pay more than what they felt they owed.  The Comptroller of State of Maryland hit them up for tax delinquencies.

(If you don’t get the whole concept here, you should check my blogs where I discuss how I want the US to impose taxes on all corporations worldwide- using the Multistate Tax Compact as a guide.  Here is one– and another blog to review.)

The state’s own Court of Appeals held in the Wynne’s favor in 2013- saying that the credit certainly applies to both the state and county tax, until the full credit is employed.  Any other ruling would have discriminated against interstate commerce, it would violate the Commerce Cause of the US Constitution.  Had the case stopped there, only Maryland business owners would have been affected.  (That would have amount to about 55000 taxpayers.)  Going forward, it means $ 42 million in fewer taxes are to be collected in Maryland, or about $ 800 per taxpayer.

But, the State of Maryland held that they had the right to tax the income of residents- regardless of wherever that income is earned.  So they appealed the ruling to the US Supreme Court (which decided the case in a 5 to 4 decision).  Which affirmed the Maryland court decision (Comptroller of the Treasurer of Maryland v. Wynne)- which makes it the rule of the land now.  This means that small businesses now have the same protection against dual taxation as the big corporations have.

By the way, Maryland seems to have been pretty sure it was going to lose.  That’s why they lowered the interest rate due to taxpayers when a refund is to be issued, right before this case hit the Supreme Court.   (Yeah.  I know it sucks, too.)