2000 state tax laws at a glance

By Sandra L. Glock, CPA, MS
Clifton Gunderson, LLC
Chairperson, State Taxation Committee

The following are brief descriptions of legislation exacted by the 2000 session of the Maryland General Assembly that may have the greatest impact on your clients or your business. Further details on each law can be found in its complete bill as cited.

Income tax

Maryland Research and Development Tax Credit: Senate Bill 309/House Bill 14 established a research and development (R&D) income tax credit allowed against personal and corporate income taxes that is modeled somewhat after the federal research and development tax credit program. The new tax credit has two parts: (1) a nonincremental credit based on a taxpayer's R&D expenses up to the "base" amount of Maryland R&D expenses, and (2) a credit based on "incremental" spending, or spending above the base amount. The nonincremental credit is 3 percent of qualifying R&D expenditures while the incremental income tax credit is 10 percent of expenditures. Application for the credits must be submitted for approval to the Department of Business and Economic Development (DBED) by September 15, and they will certify the amount of credits approved by Dec. 15. The total amount of each credit approved by DBED for all taxpayers cannot exceed $3 million annually, for a total of $6 million. Credits may be claimed on returns for tax years 2000 through 2004. Credits in excess of the entity's Maryland tax liability may be carried forward for up to 15 years.

Tax Credit for Commuter Benefits: Senate Bill 244/House Bill 310 expands the definition of the tax credit created by the legislature in 1999 for employers that provide commuting benefits to their employees. The credit remains equal to 50 percent of the cost of commuting expenses provided by the employer, subject to a maximum credit of $30 per employee per month. Year 2000 legislation expands the credit to cover the expenses of a "cash in lieu of parking program" or a "guaranteed ride home." The legislation also allows tax-exempt organizations to apply the credit against employee withholding taxes owed to the Comptroller.

Subtraction for Handicap Expenses: House Bill 1103 allows an income tax subtraction modification for 100 percent of the expenses incurred by a taxpayer to purchase and install handrails on existing elevators in health care facilities or any other building in which at least 50 percent of the space is used for medical purposes.

Tax Credit for Long-Term Care Insurance Premiums: Senate Bill 171 creates a one-time credit against the personal income tax for premiums paid for long-term care insurance covering the individual or their spouse, parent, stepparent, child or stepchild. Eligible premiums are those defined under the applicable sections of the Internal Revenue Code. The credit may not exceed $500 for each insured person and may not be claimed by more than one taxpayer for the covered individual, for individuals covered by long-term care insurance before July 1, 2999, or for individuals for whom a credit was claimed in any previous year. The credit is effective beginning with tax year 2000. NOTE: This credit does not alter or replace the already existing Maryland credit to employers for employer-provided long-term care insurance.

Tax Credit for New or Expanded Business Premises: Senate Bill 86, effective July 1, 2000, reduces the required number of individuals a business must employ in new permanent full-time positions during a 24-month period, during which the business must also obtain and occupy the new or expanded premises, from 25 to 10 employees.

Earned Income Credit: The phase-in from 12.5 percent to 15 percent of the percentage of the federal earned income credit used for determining the Maryland refundable credit is accelerated, becoming effective for tax year 2000. The law also grants each county the authority to provide a refundable earned income.

Subtraction for Adoption Expenses: Beginning Jan. 1, 2000, individuals may now claim up to a $6,000 subtraction modification for expenses incured in adopting a child with a special need and $5,000 for a child without a special need (Senate Bill 316). These thresholds are double that provided under the old law.

Credit for Child and Dependent Care Expenditures: Senate Bill 335 expands the current credit for child and dependent care expenses by (1) increasing the percentage of the federal credit upon which the state credit is based from 25 percent to 32.5 percent and by (2) increasing the federal adjusted gross income levels at which the credit begins to phase out from $15,000 and $20,000 for "married filing separately" tax status and from $30,000 to $40,000 for all others. These changes are effective for tax years beginning in 2001.

Work, Not Welfare, and Qualifying Employees with Disabilities Tax Credits: House Bill 1015 makes various changes to the Work, Not Welfare, and Qualifying Employees with Disabilities tax credits in an effort to match the requirements of the State credits to similar credits offered at the federal level. The bill: (1) provides that a person who was a recipient of temporary cash assistance for three of the last 18 months is a qualified employment opportunity employee for purposes of the Work, Not, Welfare, tax credit; (2) provides that the Department of Labor, Licensing, and Regulation is the agency responsible for administering the credit for hiring qualified employees with disabilities; (3) includes disabled veterans within the definition of a qualified employee for purposes of the credit; (4) increases the credit for hiring a disabled person from 20 to 30 percent of a certain amount of wages; and (5) extends the applicability of both credits through tax year 2005 for employees hired before July 1, 2003. These changes are effective for employees hired on or after July 1, 2000.

Subtraction for Fire, Rescue, and Emergency Medical Services Members: The current subtraction modification for volunteer fire, rescue, and emergency medical services personnel is expanded by gradually reducing the duration of service required in volunteer organizations from 72 to 36 months. The change is phased in over four years beginning with tax year 2001.

Franchise Tax: Senate Bill 56 repeals the financial institution franchise tax and replaces it with the corporate income tax, effective Jan. 1, 2001. This change occurred for banks and trust companies three years ago. The bill also repeals the savings and loan association franchise tax and makes the personal property of savings and loan associations, other than certain computer hardware and software, subject to the property tax. After the tax provisions in the bill take effect, all financial institutions will be taxed the same, except that certain financial institutions, such as mortgage, credit, and loan companies, will remain entirely exempt from taxes on personal property.

Sales and use tax

Tax-Free Week: Several bills were introduced in the 2000 session to temporarily eliminate the sales and use tax on clothing. Senate Bill 103/House Bill 170 exempt from the sales and use tax the sale of clothing or footwear (excluding accessories) during the week of August 10 through August 16, 2001, if the taxable price of the individual item is less than $100. Accessory items are defined as jewelry, watches, watchbands, handbags, handkerchiefs, umbrellas, scarves, ties, headbands, and belt buckles. Other states implementing these sales tax-free weeks, generally to coincide with the "back to school" shopping season, have reported successful by providing a benefit to families, despite the loss of revenue to the state.

Film Production Activity Exemption: Effective July 1, 2000, tangible personal property or a taxable service that is used directly in connection with a "film production activity" becomes exempt from the sales and use tax under Senate Bill 192/House Bill 926.

Exemption for Bottled Water: Effective July 1, 2000, bottled water for human consumption sold in containers of one gallon or more is exempt from the sales tax under Senate Bill 408.

Bulk Vending Machines: Merchandise sold through a "bulk vending machine" is exempt from the sales and use tax if the taxable price of the merchandise is 25 cents or less under Senate Bill 302/House Bill 394. Effective July 1, 2000. Maryland Clean Energy Incentives Act. This law (Senate Bill 670/House Bill 20) provides an exemption from the sales and use tax for sales for certain electric appliances that meet or exceed the applicable energy star efficiency requirements developed by the United State Environmental Protection Agency and the United States Department of Energy, including energy-efficient clothes washers, room air conditioners, and refrigerators, for certain limited periods of time. On or before July 1, 2004, the sale of energy-efficient fuel cells that generate electricity and heat, natural gas heat pumps, electric heat pump hot water heaters, electric heat pumps, central air conditioners, and advanced natural gas water heaters will be exempt from the sales and use tax.

Estate and inheritance tax

Inheritance Tax Repeal: Although full repeal of the inheritance did not make its way through the legislature during the 2000 session, significant relief was granted through the adoption of Senate Bill 1. Maryland inheritance tax will no longer apply to property passing to these types of beneficiaries: the decedent's spouse, children and their spouses, parents, stepparents or stepchildren, grandparents, brothers and sisters, and other lineal descendants, or to a corporation if all of its stockholders consist of those persons. The repeal is effective July 1, 2000, and applies to all decedents dying on or after July 1, 2000.

Estate Tax — Small Estates: House Bill 322 provides that the value of an estate that can be administered as a small estate is increased from $20,000 to $30,000. Also, an estate valued at $50,000 or less can also be administered as a small estate if all of the property is being transferred to a spouse. Being administered as a small estate exempts the estate from inheritance taxes, certain state fees and reduces the paperwork required to handle an estate. Effective July 1, 2000, applying to decedents who die on or after July 1, 2000.

Estate Tax — Donation of a Conservation Easement: This law (House Bill 456) gives personal representatives, trustees, and fiduciaries the authority to donate conservation easements on property if a will or other governing instrument directs them to do so or if they have consents from everyone having an interest in the property. This expands their ability to take advantage of certain estate tax exclusions allowed under Section 2031(c) of the Internal Revenue Code and reduces the value of the estate subject to estate taxes.

The change is effective July 1, 2000, retroactive to donations from estates of decedents who died on or after Jan. 1, 1998.

This is a summary of the major bills affecting CPAs. For further clarification of the language of the above cited bills and a complete history of legislation passed in the 2000 session, you can request a copy of the Comptroller's "2000 Legislative Summary" by visiting Maryland's legislative information service at mlis.state.md.us.

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