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Tax Law

Wynne or Lose: Maryland Court of Appeals Upholds Constitutionality of Reduced Interest Rate on Wynne Refunds

On June 5th, the Maryland Court of Appeals held that a reduced interest rate on refunds paid to taxpayers as a result of the U.S. Supreme Court’s decision in Comptroller of Maryland v. Wynne did not violate the U.S. Constitution’s dormant Commerce Clause.

In 2018, the U.S. Supreme Court held that a Maryland statute that authorized a credit for taxes paid to other states was unconstitutional to the extent it applied only to the state portion of Maryland’s income tax, and not to the county “piggyback.” After the Court’s ruling, the Maryland General Assembly made two relevant amendments to the law. It amended the credit so that it would also apply to the county portion, and it also authorized interest on refunds related to the county portion of the credit at a prime rate of 3%, rather than the 13% interest rate paid on certain other tax refunds.

After their successful challenge to the constitutionality of the underlying credit provision, the Wynnes brought a new action challenging the reduced interest rate. The Wynnes again invoked the dormant Commerce Clause, arguing that the Comptroller must pay the same 13% interest rate that it uses for other income tax refunds.

The Maryland Court of Appeals disagreed. The court first determined that a tax refund is distinct from interest paid on a refund, and that the latter does not “implicate[] interstate commerce sufficiently to awaken the dormant Commerce Clause.” The court explained that the payment of interest on tax refunds is a matter of legislative grace, and that the legislature may periodically adjust the interest rate. The court noted that in many instances, the Comptroller pays no interest, and here, the 3% rate paid was tied to the prime rate used by banks, which ensured “fair compensation,” while maintaining the state’s “fiscal integrity.” By reducing the rate from 13% to 3% for Wynne refunds, the state saved an estimated $38 million.

Although the court determined that interest rates do not implicate the dormant Commerce Clause, it nevertheless analyzed the constitutional issue and determined that even if the dormant Commerce Clause were implicated, the reduced interest rate did not create interstate discrimination. Rather, the court reasoned that both the reduced 3% rate and the ordinary 13% rate would produce windfalls for the Wynnes, because both rates exceeded the rate of inflation. Thus, the court determined that even with the reduced interest rate, the Wynnes are better off than taxpayers who engaged solely in intrastate business, received full credit for income taxes they paid to other states, and never had to seek refunds.

Wynne v. Comptroller of Maryland, No. 12 (Md. June 5, 2020)