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Supreme Court agrees to hear arguments in Maryland tax dispute

By Patrick Temple-West

WASHINGTON (Reuters) - The Supreme Court on Tuesday agreed to hear oral arguments in a Maryland income-tax dispute that could have broad consequences for state and local governments nationwide.

The dispute between the Maryland tax agency and a small business in that state centers on whether state residents can reduce or even eliminate their Maryland income taxes based on how much they paid in taxes to other states.

Maryland offers a tax credit for income taxes paid by residents to other states, but the state is arguing the credit does not apply to certain county-level income taxes under Maryland law.

Brian and Karen Wynne, a Maryland couple, owned a partnership business that paid taxes in 39 states in 2006. Maryland denied the couple's claim of $84,550 in credits for out-of-state taxes, saying the credits did not apply to the couple’s county income tax.

A Maryland circuit court ruled for the Wynnes. The Court of Appeals of Maryland upheld that decision in January 2013, saying Maryland’s tax system "discriminates against interstate commerce."

Dominic Perella, a lawyer with Hogan Lovells who is representing the Wynnes, said in a statement on Tuesday: "Maryland’s approach is unfair to people who make money in more than one state."

A spokesman for the Maryland Attorney General said: "We look forward to presenting our case and having this matter decided by the Supreme Court."

The Obama administration said the lower court's decision was incorrect and in April asked the Supreme Court to review it. Maryland stands to lose $45 million to $50 million a year if the appeals court ruling stands, Obama administration lawyers said in court filings.

Trade groups representing U.S. mayors and local government executives also petitioned the Supreme Court to hear the case, saying that if states must offer a credit for all income taxes paid to out-of-state jurisdictions, "the flow of funds to in-state municipalities will be vastly curtailed."

A Supreme Court win for the Maryland government would prompt other states to look at ways to limit tax credits as a way to raise revenues, said Lance Jacobs, a lawyer at Pepper Hamilton LLP.

But because lower courts have already ruled for the Wynnes, the Obama administration will have a hard time convincing the high court judges to overturn those decisions, Jacobs said.

"I can’t see them getting a better result before the Supreme Court," he said.

Oral arguments in this case will likely be scheduled during the court's fall 2014 term.

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

(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh and Cynthia Osterman)

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