Frost Law
As we previously discussed on April 22nd, 2019, the Wynnes challenged a Maryland law claiming the interest rate on Wynne appeals violated the dormant commerce clause. On June 5, 2020, the Maryland Court of Appeals held that the General Assembly’s remedial amendments to the Maryland tax code did not violate the dormant Commerce Clause of the federal Constitution as it pertains to income tax refund interest rates.¹ Practically speaking, this decision means that those Marylanders who already paid what was deemed an unconstitutional tax by the United States Supreme Court will be refunded with an interest rate reflecting only the prime rate used by banks, which is considerably lower than the minimum 13% interest rate that was effective before the General Assembly’s amendments.
In 2013, taxpayers challenged the Maryland Comptroller’s disallowance of a credit for the county income claimed on their 2006 income tax return.² The taxpayers maintained that the system’s two-tiered structure (comprised of a state tax and a state-administered county tax) effectively penalized Marylanders who had a credit for taxes paid to other states that was greater than the taxpayer’s Maryland state-level tax. Those taxpayers were precluded from applying the excess credit to offset the county-level tax.
While the case worked its way up to the Supreme Court, the Maryland legislature, in 2014, tried to preemptively ameliorate the effects of a Supreme Court decision in taxpayers’ favor. Fully aware that a decision in taxpayers’ favor would mean considerable refund pay outs along with accumulated interest, the legislature enacted Section 16 of the Budget Reconciliation and Financing Act of 2014 (2014 BRFA §16) to retroactively lower the interest rate (from 13% to 3.25%) for Wynne refunds only.
In 2015, the Supreme Court did indeed find that Maryland’s system violated the dormant Commerce Clause. The Supreme Court stated that “the result in this case is all but dictated by this Court’s dormant Commerce Clause cases, [. . .] which all invalidated state tax schemes that might lead to double taxation of out-of-state income and that discriminated in favor of intrastate over interstate economic activity.”³
Following the Supreme Court ruling, the Comptroller issued tax refunds to taxpayers that were affected by the General Assembly amendments, including interest computed at an annual 3% rate. Taxpayers impacted by Wynne took issue with the interest adjustment and filed suit in the Maryland Tax Court. The Maryland Tax Court found the lower interest rates unconstitutional, stating:
The Wynne refunds are the result of income tax provisions relating to income earned in other states by Maryland residents that only allow credits against the State income tax and not against county “piggy back” taxes. The U.S. Supreme Court ruled this was unconstitutional.”
Following the exact same logic, granting interest at a lower rate must also be unconstitutional.⁴“
The Comptroller pursued judicial review of this decision in the Circuit Court for Anne Arundel County. The Circuit Court determined that 2014 BRFA §16 did not violate the dormant Commerce Clause. Accordingly, it reversed the Maryland Tax Court decision and remanded for further proceedings.
The Wynnes timely appealed to the Maryland Court of Special Appeals and their writ of certiorari was granted.
The Maryland Court of Appeals (Court) noted that the Maryland tax code only provides for payment of interest with respect to a taxpayer’s claim for refund of an income tax overpayment in limited circumstances.⁵
Additionally, the Court clarified that in situations where “the General Assembly has authorized the payment of interest on tax refunds, it has periodically adjusted the rate of interest.”⁶ The Court continues by stating that:
Pertinent to this case, in 2006, the General Assembly amended the statute to increase the interest rate on income tax refunds to a minimum of 13%. [. . .] A decade later, the General Assembly amended that statue to gradually reduce the minimum rate of interest on tax refunds.⁷“
The Court proceeded to explain that per the Maryland Constitution, and in contrast to the federal Constitution, the state budget must be balanced.⁸ In order to better carry out this requirement, the Court stated that additional legislation is often proposed and enacted with the specific purpose of complementing “the estimates of revenues and expenditures in the Budget Bill to ensure that the budget is balanced.”⁹ Often the additional legislation is titled as the Budget Reconciliation and Financing Act, noted the Court, and such bills work to close any Budget Bill gaps existing between expenditures and revenues.
Finally, acknowledging that state fiscal laws are sometimes restricted by the federal Constitution, the Court reiterated that the Commerce Clause refers to the federal Constitution’s express direction that the regulation of interstate commerce belongs to Congress. Furthermore, a negative implication arises therefrom such that states are prohibited from discriminating against interstate commerce without Congressional approval. And this negative implication is, in fact, the dormant Commerce Clause.
And the dormant Commerce Clause has been noted by Justice Jackson as being a source of great power and conflict, because “it does not say what the states may or may not do in the absence of Congressional action, nor how to draw the line between what is and what is not commerce among the states.”¹⁰ Therefore, as the court notes, it has been left to the Supreme Court to interpret and give meaning to the dormant Commerce Clause.¹¹
The Court first recounted how its previous analysis, like the Supreme Court’s analysis, used the “internal consistency test” to assess the tax system under the dormant Commerce Clause.¹² Note that courts applying the internal consistency test must assume that every state enacts the challenged tax system, and then determine whether, in the context of such a hypothetical world, interstate commerce bears a greater burden than in-state commerce. Ultimately, the Court agreed that the hypotheticals considered in such analysis demonstrated that those who earned income from interstate activities paid more in taxes than those who earned all of their income from intrastate activities. Thus, the Maryland tax system violated the dormant Commerce Clause.
But the Court concluded that the state had subsequently properly compensated such taxpayers by issuing refunds along with interest calculated at the prime rate—an amount exceeding the present value of the additional taxes that they paid in 2006.
Indeed, the Court goes on to point out that 2014 BRFA §16 “is part of the remedy provided by the General Assembly for the constitutional violation found by this Court and confirmed by the Supreme Court in the prior litigation.”¹³ The Court further explained that per the Due Process Clause, the state must provide a remedy—a “clear and certain remedy”—for a dormant Commerce Clause violation, but the Court emphasized that the remedy does not necessarily have to be a refund.¹⁴ If the state does provide a refund, it can decide to limit that refund by considering its “legitimate interest in sound fiscal planning.”¹⁵
Next, the Court described the application of the dormant Commerce Clause as first requiring an assessment as to whether a challenged state law regulates interstate commerce, and if it does regulate interstate commerce, then further ascertaining whether the challenged law discriminates against interstate commerce.¹⁶
With that framework established, the Court found that 2014 BRFA §16 failed both parts. First, according to the Court, various state laws involving industry regulations or taxes do implicate interstate commerce; however, the Court believed “the rate of interest paid on a tax refund provided as a remedy for a past constitutional violation” is fundamentally different from a tax.¹⁷
Second, having already concluded that the interest rates at issue are “not the sort of state action that implicates interstate commerce sufficiently to awake the dormant Commerce Clause,” it still proceeded to consider the Wynne’s argument that 2014 BRFA §16 discriminates against interstate commerce. Noting that the Wynnes bear the burden of proving a discriminatory effect, the Court highlighted that they had not provided any evidence that the 2014 BRFA §16 interest rate would change the competitive balance of interstate investment or business.
Instead, the Court stated that the Wynnes maintained only that 2014 BRFA §16 discriminates because: (1) the Wynnes received a lower interest rate than taxpayers engaged in intrastate commerce received, and (2) “the ‘defining feature’ of Wynne claimants is that they engaged in interstate commerce.”¹⁸ The Court also noted that the Wynnes believed Marylanders involved in interstate commerce would perceive the disparate treatment of this defined group as indicative that Maryland will unfairly treat taxpayers engaged in interstate commerce, ultimately disincentivizing interstate investment.
The Court dismissed the Wynnes’ concerns by explaining that (1) in fact, the majority of taxpayers (even one engaged in interstate business activities) who receive a refund are not paid any interest at all on those refunds, and (2) just because a law only affects out-of-state entities is insufficient by itself to prove that the law discriminates against interstate commerce.¹⁹
Finally, the Court pointed out that the Wynnes had abandoned the internal consistency test, assuming that:
[The Wynnes] evidently found it difficult, as do we, to hypothesize a counterpart taxpayer engaged in solely intrastate activities who prevails in a constitutional challenge to the State tax code that results in a refund to the taxpayer and others, as well as a sizeable hit to the State budget, who would receive a better remedy from the General Assembly [. . .] They have not borne the burden of showing discrimination in effect.²⁰
We don’t know yet whether the Wynnes will seek judicial review from the Supreme Court regarding this decision. However, we remind our readers again that as the law in Maryland stands now, those Marylanders who previously paid a tax which was ultimately deemed by the United States Supreme Court to be unconstitutional, are stuck with getting refunds at an interest rate reflecting only the prime rate used by banks—significantly lower than the minimum 13% interest rate that was effective before the General Assembly’s amendments.
EDITOR’S NOTE: We will continue to follow any further developments in this matter, and you can read our earlier analysis here.
If you have any questions or concerns about the most recent Wynne development, or any other tax questions, contact Frost Law at 410-862-2890 or fill out our online form.
As we previously discussed on April 22nd, 2019, the Wynnes challenged a Maryland law claiming the interest rate on Wynne appeals violated the dormant commerce clause. On June 5, 2020, the Maryland Court of Appeals held that the General Assembly’s remedial amendments to the Maryland tax code did not violate the dormant Commerce Clause of the federal Constitution as it pertains to income tax refund interest rates.¹ Practically speaking, this decision means that those Marylanders who already paid what was deemed an unconstitutional tax by the United States Supreme Court will be refunded with an interest rate reflecting only the prime rate used by banks, which is considerably lower than the minimum 13% interest rate that was effective before the General Assembly’s amendments.
In 2013, taxpayers challenged the Maryland Comptroller’s disallowance of a credit for the county income claimed on their 2006 income tax return.² The taxpayers maintained that the system’s two-tiered structure (comprised of a state tax and a state-administered county tax) effectively penalized Marylanders who had a credit for taxes paid to other states that was greater than the taxpayer’s Maryland state-level tax. Those taxpayers were precluded from applying the excess credit to offset the county-level tax.
While the case worked its way up to the Supreme Court, the Maryland legislature, in 2014, tried to preemptively ameliorate the effects of a Supreme Court decision in taxpayers’ favor. Fully aware that a decision in taxpayers’ favor would mean considerable refund pay outs along with accumulated interest, the legislature enacted Section 16 of the Budget Reconciliation and Financing Act of 2014 (2014 BRFA §16) to retroactively lower the interest rate (from 13% to 3.25%) for Wynne refunds only.
In 2015, the Supreme Court did indeed find that Maryland’s system violated the dormant Commerce Clause. The Supreme Court stated that “the result in this case is all but dictated by this Court’s dormant Commerce Clause cases, [. . .] which all invalidated state tax schemes that might lead to double taxation of out-of-state income and that discriminated in favor of intrastate over interstate economic activity.”³
Following the Supreme Court ruling, the Comptroller issued tax refunds to taxpayers that were affected by the General Assembly amendments, including interest computed at an annual 3% rate. Taxpayers impacted by Wynne took issue with the interest adjustment and filed suit in the Maryland Tax Court. The Maryland Tax Court found the lower interest rates unconstitutional, stating:
The Wynne refunds are the result of income tax provisions relating to income earned in other states by Maryland residents that only allow credits against the State income tax and not against county “piggy back” taxes. The U.S. Supreme Court ruled this was unconstitutional.”
Following the exact same logic, granting interest at a lower rate must also be unconstitutional.⁴“
The Comptroller pursued judicial review of this decision in the Circuit Court for Anne Arundel County. The Circuit Court determined that 2014 BRFA §16 did not violate the dormant Commerce Clause. Accordingly, it reversed the Maryland Tax Court decision and remanded for further proceedings.
The Wynnes timely appealed to the Maryland Court of Special Appeals and their writ of certiorari was granted.
The Maryland Court of Appeals (Court) noted that the Maryland tax code only provides for payment of interest with respect to a taxpayer’s claim for refund of an income tax overpayment in limited circumstances.⁵
Additionally, the Court clarified that in situations where “the General Assembly has authorized the payment of interest on tax refunds, it has periodically adjusted the rate of interest.”⁶ The Court continues by stating that:
Pertinent to this case, in 2006, the General Assembly amended the statute to increase the interest rate on income tax refunds to a minimum of 13%. [. . .] A decade later, the General Assembly amended that statue to gradually reduce the minimum rate of interest on tax refunds.⁷“
The Court proceeded to explain that per the Maryland Constitution, and in contrast to the federal Constitution, the state budget must be balanced.⁸ In order to better carry out this requirement, the Court stated that additional legislation is often proposed and enacted with the specific purpose of complementing “the estimates of revenues and expenditures in the Budget Bill to ensure that the budget is balanced.”⁹ Often the additional legislation is titled as the Budget Reconciliation and Financing Act, noted the Court, and such bills work to close any Budget Bill gaps existing between expenditures and revenues.
Finally, acknowledging that state fiscal laws are sometimes restricted by the federal Constitution, the Court reiterated that the Commerce Clause refers to the federal Constitution’s express direction that the regulation of interstate commerce belongs to Congress. Furthermore, a negative implication arises therefrom such that states are prohibited from discriminating against interstate commerce without Congressional approval. And this negative implication is, in fact, the dormant Commerce Clause.
And the dormant Commerce Clause has been noted by Justice Jackson as being a source of great power and conflict, because “it does not say what the states may or may not do in the absence of Congressional action, nor how to draw the line between what is and what is not commerce among the states.”¹⁰ Therefore, as the court notes, it has been left to the Supreme Court to interpret and give meaning to the dormant Commerce Clause.¹¹
The Court first recounted how its previous analysis, like the Supreme Court’s analysis, used the “internal consistency test” to assess the tax system under the dormant Commerce Clause.¹² Note that courts applying the internal consistency test must assume that every state enacts the challenged tax system, and then determine whether, in the context of such a hypothetical world, interstate commerce bears a greater burden than in-state commerce. Ultimately, the Court agreed that the hypotheticals considered in such analysis demonstrated that those who earned income from interstate activities paid more in taxes than those who earned all of their income from intrastate activities. Thus, the Maryland tax system violated the dormant Commerce Clause.
But the Court concluded that the state had subsequently properly compensated such taxpayers by issuing refunds along with interest calculated at the prime rate—an amount exceeding the present value of the additional taxes that they paid in 2006.
Indeed, the Court goes on to point out that 2014 BRFA §16 “is part of the remedy provided by the General Assembly for the constitutional violation found by this Court and confirmed by the Supreme Court in the prior litigation.”¹³ The Court further explained that per the Due Process Clause, the state must provide a remedy—a “clear and certain remedy”—for a dormant Commerce Clause violation, but the Court emphasized that the remedy does not necessarily have to be a refund.¹⁴ If the state does provide a refund, it can decide to limit that refund by considering its “legitimate interest in sound fiscal planning.”¹⁵
Next, the Court described the application of the dormant Commerce Clause as first requiring an assessment as to whether a challenged state law regulates interstate commerce, and if it does regulate interstate commerce, then further ascertaining whether the challenged law discriminates against interstate commerce.¹⁶
With that framework established, the Court found that 2014 BRFA §16 failed both parts. First, according to the Court, various state laws involving industry regulations or taxes do implicate interstate commerce; however, the Court believed “the rate of interest paid on a tax refund provided as a remedy for a past constitutional violation” is fundamentally different from a tax.¹⁷
Second, having already concluded that the interest rates at issue are “not the sort of state action that implicates interstate commerce sufficiently to awake the dormant Commerce Clause,” it still proceeded to consider the Wynne’s argument that 2014 BRFA §16 discriminates against interstate commerce. Noting that the Wynnes bear the burden of proving a discriminatory effect, the Court highlighted that they had not provided any evidence that the 2014 BRFA §16 interest rate would change the competitive balance of interstate investment or business.
Instead, the Court stated that the Wynnes maintained only that 2014 BRFA §16 discriminates because: (1) the Wynnes received a lower interest rate than taxpayers engaged in intrastate commerce received, and (2) “the ‘defining feature’ of Wynne claimants is that they engaged in interstate commerce.”¹⁸ The Court also noted that the Wynnes believed Marylanders involved in interstate commerce would perceive the disparate treatment of this defined group as indicative that Maryland will unfairly treat taxpayers engaged in interstate commerce, ultimately disincentivizing interstate investment.
The Court dismissed the Wynnes’ concerns by explaining that (1) in fact, the majority of taxpayers (even one engaged in interstate business activities) who receive a refund are not paid any interest at all on those refunds, and (2) just because a law only affects out-of-state entities is insufficient by itself to prove that the law discriminates against interstate commerce.¹⁹
Finally, the Court pointed out that the Wynnes had abandoned the internal consistency test, assuming that:
[The Wynnes] evidently found it difficult, as do we, to hypothesize a counterpart taxpayer engaged in solely intrastate activities who prevails in a constitutional challenge to the State tax code that results in a refund to the taxpayer and others, as well as a sizeable hit to the State budget, who would receive a better remedy from the General Assembly [. . .] They have not borne the burden of showing discrimination in effect.²⁰
We don’t know yet whether the Wynnes will seek judicial review from the Supreme Court regarding this decision. However, we remind our readers again that as the law in Maryland stands now, those Marylanders who previously paid a tax which was ultimately deemed by the United States Supreme Court to be unconstitutional, are stuck with getting refunds at an interest rate reflecting only the prime rate used by banks—significantly lower than the minimum 13% interest rate that was effective before the General Assembly’s amendments.
EDITOR’S NOTE: We will continue to follow any further developments in this matter, and you can read our earlier analysis here.
If you have any questions or concerns about the most recent Wynne development, or any other tax questions, contact Frost Law at 410-862-2890 or fill out our online form.
