Holzheid v. Comptroller of the Treasury of Md.

• Decision Date: 28 March 2019
• Docket Number: No. 2374, Sept. Term, 2017,2374, Sept. Term, 2017
• Citation: 205 A.3d 43,240 Md.App. 371
• Parties: Michael J. HOLZHEID, et al., v. COMPTROLLER OF the TREASURY OF MARYLAND, et al.
• Court: Court of Special Appeals of Maryland

240 Md.App. 371

205 A.3d 43

Michael J. HOLZHEID, et al.,

v.COMPTROLLER OF the TREASURY OF MARYLAND, et al.

No. 2374, Sept. Term, 2017

Court of Special Appeals of Maryland.

March 28, 2019

Argued by: Andrew D. Levy (Jean M. Zachariasiewicz, Abigail A. Graber, Brown Goldstein & Levy, LLP, Stuart Levine, Law Offices of Stuart Levine, LLC, on the brief), Baltimore, MD, for Appellant.

Argued by: Ryan R. Dietrich (Brian E. Frosh, Atty. Gen., on the brief), Baltimore, MD, for Appellee.

Panel: Nazarian, Arthur, Lynne A. Battaglia (Senior Judge, Specially Assigned), JJ.^*

Battaglia, J.

When a Maryland resident earns income from sources outside of the State, the income is taxed as though earned in the State. Comptroller v. Wynne , 431 Md. 147, 156–57, 64 A.3d 453 (2013), aff'd , ––– U.S. ––––, 135 S.Ct. 1787, 191 L.Ed.2d 813 (2015). Maryland, though, provides a credit against an individual's State tax liability for income taxes paid to other states levied on income earned in the other states.¹ Maryland Code (1988, 2010 Repl. Vol.), Section 10-703 of the Tax-General Article.² Prior to 2013, however, a credit to offset income taxes collected on behalf of Baltimore City and each of the counties, oftentimes referred to as a "piggy back" tax, Coerper v. Comptroller , 265 Md. 3, 5, 288 A.2d 187 (1972), was not available for a Maryland resident who earned out-of-state income, thereby, resulting in a "double taxation" on the local level.³ Wynne , 431 Md. at 155, 64 A.3d 453. A change to this scheme was occasioned by a suit filed by Brian and Karen Wynne who challenged the double taxation by the counties and Baltimore City on income earned in other states.

The Wynnes have been Maryland residents living in Howard County for a number of years. 431 Md. at 148, 64 A.3d 453. In 2006, Mr. Wynne owned stock in Maxim Healthcare Services, Inc. ("Maxim"), a Subchapter S corporation.⁴ 135 S.Ct. at 1793. That year, Maxim earned income in states other than Maryland, as it filed state income tax returns in 39 states. Id. As "pass-through" income earners of Maxim, the Wynnes reported a portion of the corporation's income on their joint federal and Maryland income tax returns. Id. On their 2006 Maryland income tax return, they claimed an income tax credit for income taxes they paid to other states pursuant to Section 10-703(c) of the Tax-General Article against not only their state tax, but also the "piggy back" tax. Id. ; 431 Md. at 159, 64 A.3d 453.

The Comptroller, however, assessed a tax deficiency against the Wynnes and allowed them a credit against their Maryland "state" income tax but not against their "county" income tax. 135 S.Ct. at 1793. On appeal from the county disallowance, the Hearings and Appeals Section of the Comptroller's office slightly modified the assessment, but otherwise affirmed the Comptroller's decision, and the Maryland Tax Court affirmed. Id.

The Circuit Court for Howard County, on judicial review, however, reversed the decision on the basis that the tax system benefitting the counties and Baltimore City violated the Commerce Clause.⁵ Id. The court remanded the case back to the Tax Court. The Court of Appeals, however, granted certiorari before the remand and before this Court heard the case. 431 Md. at 159, 64 A.3d 453.

The Court of Appeals affirmed the Circuit Court. In doing so, the Court evaluated the tax scheme under the four-part test set forth in Complete Auto Transit, Inc. v. Brady , 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), by which a tax is assessed under the Commerce Clause to see whether it "applies to an activity with a substantial nexus with the taxing state," "is fairly apportioned," "is not discriminatory towards interstate or foreign commerce," and "is fairly related to the services provided by the State." 431 Md. at 147, 64 A.3d 453 (citing Complete Auto Transit, Inc. , 430 U.S. at 279, 97 S.Ct. 1076 ) ). In Wynne , the Court held that the tax scheme failed both the fair apportionment and nondiscrimination parts of the Complete Auto Commerce Clause test. 431 Md. at 165–72, 173–76, 64 A.3d 453. With respect to the fair apportionment prong, the Court initially held that the tax failed the "internal consistency" test, for if every State adopted Maryland's tax scheme, the fruits of interstate commerce would be taxed at a higher rate than intrastate commerce. Id. at 166–71, 64 A.3d 453. The Court further held that the tax scheme failed the "external consistency" test because it created the risk of multiple taxation on the same income. Id. at 171–72, 64 A.3d 453.

In terms of nondiscrimination, the Court noted that because the tax scheme denied residents a credit on income taxes paid to other states and so taxed income earned interstate at a rate higher than income earned intrastate, that the tax discriminated against interstate commerce. Id. at 173–76, 64 A.3d 453. The Court, however, noted that a "state may avoid discrimination against interstate commerce by providing a tax credit, or some other method of apportionment, to avoid discriminating against interstate commerce in violation of the dormant Commerce Clause." Id. at 189, 64 A.3d 453.

The State, though, filed a petition for certiorari to the Supreme Court, which was granted. 572 U.S. 1134, 134 S. Ct. 2660, 189 L.Ed.2d 208 (2014). The Supreme Court affirmed and held that because Maryland failed to provide a credit against the county portion of income taxes, the Maryland tax scheme as applied to the Wynnes necessarily violated the dormant Commerce Clause, for reasons similar to those postulated by the Court of Appeals. 135 S.Ct. at 1792.

As a result, Wynne and others similarly affected by having had paid county income taxes as well as taxes to other states for income earned therein became entitled to refunds of a portion of their Maryland "piggy back" taxes. Many of the individuals affected by Wynne then filed amended tax returns with the Comptroller, claiming a refund on the portion of tax paid to the counties to which no credit for out-of-state taxes had been provided.

At the time of the Wynne litigation, the interest rate on unpaid income tax refunds was 13% without regard to the source of the income. Maryland Code (1988, 2010 Repl. Vol.), Section 13-604 of the Tax-General Article.⁶ While Wynne was pending before the Supreme Court, though, the General Assembly enacted Section 16 of the Budget Reconciliation and Financing Act of 2014 ("Section 16"),⁷ which reduced the interest rate on refunds under Wynne to approximately 3%.⁸ 2014 Maryland Laws, Chapter 464, Section 16.⁹

In the present case, Michael J. Holzheid, Bruce Feinerman, and Jeffrey and Arielle Grill, individuals affected by Wynne , also filed amended Maryland income tax returns claiming an additional credit against the "piggy back" portion of their Maryland personal income tax. They also claimed refunds of Maryland taxes that they had, under Wynne , overpaid in prior years, along with applicable interest, and ultimately, they received refunds, but with interest calculated, not at 13%, but, pursuant to Section 16.

Contending that they were entitled to 13% interest on their refunds, the litigants filed a complaint on behalf of themselves and putative class members in the Circuit Court for Baltimore City to challenge the legality of Section 16.¹⁰ In Count One of their complaint, they facially challenged Section 16's reduced interest rate on the basis that it violated the Fourteenth Amendment of the United States Constitution.¹¹ In Count Two, they claimed that the reduced interest rate violated the Commerce Clause of the United States Constitution. In Count Three, they questioned the reduction of the interest rate on the ground that it served as an unconstitutional taking without due process or just compensation, thereby, violating the Fifth Amendment,¹² as incorporated to the states by the Fourteenth Amendment of the United States Constitution. And in Count Four, they alleged that the Comptroller was liable to them and all other putative class members, in his personal capacity, for the aforementioned alleged constitutional violations, pursuant to Section 1983 of Title 42, United States Code.

The State moved to dismiss the complaint on the ground that the group had failed to exhaust their administrative remedies for the resolution of tax disputes by failing to pursue their action in the Maryland Tax Court. Initially, the Circuit Court denied the motion to dismiss, and subsequently, denied the State's motion for reconsideration. Thereafter, the litigants filed a motion for class certification, which the State opposed, and both sides filed cross-motions for summary judgment.

At a hearing on the motions, Judge Yvette Bryant of the Circuit Court for Baltimore City revisited the State's motion to dismiss, and subsequently, dismissed the suit on the ground that the Circuit Court lacked jurisdiction, because the litigants failed to exhaust their administrative remedies. In so finding, Judge Bryant reasoned that "the process for resolution of issues related to tax refunds, including the proper rate of interest, rests exclusively with the Tax Court."

Judge Bryant noted, however, that if the Circuit Court had jurisdiction over the matter, she would have denied class certification, ruled that sovereign immunity barred claims against the Comptroller in his individual capacity, but would have ruled also that Section 16 violated the dormant Commerce clause, positing that

[w]hile the court finds its determination that administrative remedies are a condition precedent to this court's consideration of Plaintiffs' cause of action, this court, in the absence of dismissal, would have found that Plaintiffs' claims against the Comptroller in his individual capacity are barred by sovereign immunity but that the remaining claims are not barred by sovereign immunity. Additionally, the court would have found that applying a different rate to any interest owed to Plaintiffs would violate the dormant Commerce Clause.

The

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