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U.S. top court rules against Maryland over double taxation

WASHINGTON (Reuters) – Maryland cannot impose double taxation on residents by denying them a full credit for certain taxes paid on income earned in other states, the U.S. Supreme Court ruled on Monday in a decision that could cut revenue collected by some states and cities.

In a 5-4 ruling, the justices sided with taxpayers Brian and Karen Wynne in finding that Maryland’s taxation policy violated the U.S. Constitution by discriminating against interstate commerce, upholding lower-court decisions favoring the couple.

Maryland offers a tax credit for income taxes paid by residents to other states. But it said the credits available to the Wynnes for their out-of-state income did not apply to the couple’s county income tax.

The Wynnes were denied the full $84,550 tax credit they sought based on their healthcare business that paid taxes in 39 states in 2006. Maryland said they owed around $25,000.

The ruling could reduce tax revenues collected by local jurisdictions in Maryland by up to $50 million a year, according to a brief filed by the U.S. Conference of Mayors and other groups that backed the state.

Most states give their residents a full credit for income taxes paid to other states on earnings made there to avoid double taxation on the same income.

New York City, Detroit and Philadelphia are among cities that impose income taxes and do not provide a full credit for taxes paid out of state, according to a brief filed by the International Municipal Lawyers Association. Among states that could be affected by the ruling are Wisconsin and North Carolina, the association said.

“The fact the court ruled in favor of the taxpayer opens up a lot of questions” about the legality of out-of-state tax credit policies beyond Maryland, said Daniel Effron, an accountant at Marcum LLP in New York. “New York is at the top of the list.”

Maryland had sought Supreme Court review after the state’s high court ruled in favor of the Wynnes in January 2013.

“That Maryland’s existing tax unconstitutionally discriminates against interstate commerce is enough to decide this case,” Justice Samuel Alito wrote on behalf of the court’s majority.

In a dissenting opinion, Justice Ruth Bader Ginsburg said nothing in the Constitution prevents more than one state from seeking taxes on the same income.

“In this situation, the Constitution does not prefer one lawful basis for state taxation of a person’s income over the other,” Ginsburg wrote.

The case is Comptroller v Wynne; Docket No. 13-485.

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