Maryland legislative update: 2001 tax law changes

By Daniel F. McGuire, CPA, Esq.
Arthur Andersen LLP
Member, MACPA State Tax Committee

Adam J. Roa, Esq.
Arthur Andersen LLP

The State of Maryland enacted a variety of tax legislation for the 2001 year. The new laws include a range of income, property, and sales and use tax changes.

The highlight of the session may be the change in apportionment formula for manufacturers. Since 1992, Maryland's taxation of the income of a multistate corporation has been based on a three factor, double-weighted sales factor formula. The three-factor formula apportions corporate income to the State based on a corporation's percentage of property, percentage of payroll, and a double-weighted percentage of sales in Maryland. A growing national trend over the past several years, however, has been for states to enact apportionment formulas that give greater, or even exclusive weighting, to sales. The new law alters Maryland's corporate tax law for corporations engaged in manufacturing so that a multistate manufacturer's income is apportioned to the State based solely on its percentage of in-state sales. In an attempt to define manufacturers subject to the single factor apportionment formula, the new law defines a manufacturer as a corporation that, except for petroleum refiners, would fall under Section 11 or Sectors 31 through 33 of the North American Industrial Classification System (NAICS) of the United States Office of Budget and Management. NAICS codes are used by statistical agencies of the federal government.

Another noteworthy development is the enactment of legislation establishing an amnesty period for delinquent taxpayers from Sept. 1, 2001 through Oct. 31, 2001. The program is open to delinquent payments associated with income, sales/use tax, withholding tax, and admissions and amusement tax. While it is hoped that the State will collect up to $80 million in taxes due to this program, the largest benefit to delinquent taxpayers is the automatic waiver of penalty that is normally associated with late payment.

This article seeks to summarize, in a concise manner, the major bills passed by the legislature and signed into law by Gov. Glendening during the 2001 session. As a result, the main purpose of this article is to raise the reader's awareness of changes in the tax law. Accordingly, this article does not provide the detail necessary to formulate a supportable tax law conclusion.

A summary of the enacted tax legislation follows.

A. Manufacturing Corporations: Single Sales Factor Apportionment (HB 11)

As further discussed above, this law alters the formula used to apportion income to the State for manufacturing corporations that carry on a trade or business in and out of the State. Specified manufacturing corporations utilizing the new apportionment method are also required to submit specified reports as part of their income tax returns and requires the Comptroller to prepare and submit a report each year to the Governor and the General Assembly detailing the information from these reports. The law applies to tax years beginning after Dec. 31, 2001.

B. Tax Amnesty Program (HB 828)

The Comptroller will declare an amnesty period for delinquent taxpayers from Sept. 1, 2001, through Oct. 31, 2001, for penalties attributable to the nonpayment, nonreporting, or underreporting of income taxes, withholding taxes, sales and use taxes, or admissions and amusement taxes that are paid during the amnesty period. The new law also increases specified criminal penalties from $5,000 to $10,000 under various tax laws, effective at the end of the amnesty period, and provides for the distribution of funds received under the program.

C. Tax Credit for Green Buildings (SB 745 and HB 8)

This law provides income tax credits for the construction and/or rehabilitation of green buildings and green tenant space and for qualifying energy sources used to power green buildings and green tenant space. Eligible buildings are large commercial buildings, residential buildings, and other buildings that are a combination of commercial and residential use with greater than 20,000 square feet of interior space.

D. Refundable Earned Income Credit (SB 166)

This law phases in a 5 percent increase of the Maryland refundable earned income tax credit that will increase in total from 15 percent of the federal earned income credit to 20 percent of the federal earned income credit over the next four years. Under the new law, the State credit is increased from the current calculation of 15 percent of the federal earned income credit to: 16 percent in tax year 2001 and tax year 2002; 18 percent in tax year 2003; and 20 percent for tax years 2004 and after. For each year of the phase-in, the difference between the applicable percentage of a taxpayer's federal earned income credit and the taxpayer's State income tax liability will be refunded to that taxpayer.

E. Maryland Research and Development Tax Credit (SB 456)

The new law provides an increase, under specified circumstances of, the maximum amount that the Department of Business and Economic Development can approve in a calendar year for each component of the State research and development tax credit.

F. Enterprise Zone Credits (HB 1155)

This law increases the credits that can be claimed by enterprise zone businesses for wages paid to qualified employees. The new law also alters the definition of a qualified employee for whom a business can take an enterprise zone credit.

G. Tax Credit for Preservation and Conservation Easements (HB 681)

Individuals are permitted to take a credit against the State income tax for the conveyance of an easement in land to the Maryland Environmental Trust (MET) or the Maryland Agricultural Land Preservation Foundation (MALPF) for the purpose of preserving open space, natural resources, agriculture, forest land, watersheds, significant ecosystems, viewsheds, or historic properties if: (1) the easement is perpetual; and (2) the easement is accepted and approved by the Board of Public Works.

H. Public Safety Officers (SB 224, HB 19, and HB 1095)

This legislation expands the subtraction modification granted to volunteer police officers in 1997. The new law clarifies the application of the $3,500 subtraction modification under the Maryland income tax for individuals who are a qualifying police auxiliary or reserve volunteer for the taxable year. The law replaces the length of service requirement with participation in a police auxiliary or reserve volunteer program approved by the Police Training Commission, and provides for an income tax subtraction modification for a death benefit paid from a pension system to the surviving spouse or other beneficiary of a "law enforcement officer" or fire fighter who dies in the course of employment as a law enforcement officer or fire fighter.

I. Heritage Structure Rehabilitation Tax Credit (SB 523 and HB 1109)

The State Heritage Structure Rehabilitation Tax Credit is altered and expanded by providing that any excess amounts of the existing credit in a taxable year that exceed an individual's or a business entity's tax liability may be claimed in refund. The new law adds nonprofit entities to the definition of business entity for the purposes of the credit and allows the credit to be taken by partners and shareholders of a business entity in any manner that is agreed.

Furthermore, the new law also provides for the recapture of credits claimed within 4 years after the credit is claimed if work is performed on a certified heritage structure that, if performed as a part of the historic rehabilitation, would have made the rehabilitation ineligible for the credit.

J. Simplified Sales and Use Tax Administration Act (HB 1390)

The General Assembly has enacted the Simplified Sales and Use Tax Administration Act, as proposed by the National Conference of State Legislatures (NCSL), and further authorizes the State to discuss, and ultimately enter into, a Streamlined Sales and Use Tax Agreement with other states. It also authorizes the Comptroller to enter into the Agreement with one or more states to simplify and modernize sales and use tax administration, although further State legislation would be required to implement the Agreement's provisions.

K. Sales Tax on Condominium Utilities (SB 14)

The sale of electricity, steam, or artificial or natural gas for use in residential condominiums becomes exempt from the sales and use tax under this new law. Currently, the sales and use tax rate of 5 percent generally applies to the sale of electricity and natural gas; however, the sales tax does not apply to such sales for homes under a residential rate schedule. Condominiums, on the other hand, are currently exempt from the sales tax for their fuel charges (or other commodity costs) but are subject to the sales tax on their base rate charges for their common areas as well as any living units that are centrally metered. Individually metered units already receive the full residential rate exemption. Under the new law, the common areas of the condominium building and any centrally metered units receive the full residential exemption.

L. Exemption for Supplies Supporting Breast-Feeding (SB 252)

Tangible personal property that is manufactured for the purpose of initiating, supporting, or sustaining breast-feeding is exempt from the sales and use tax as of July 1, 2001.

M. Antique Dealers — Out-of-State Vendors (HB 284)

The new law waives a seller's obligation to collect the sales and use tax on the sale of an antique or used collectible if the seller receives a resale certificate from a purchaser with an out-of-state sales and use tax registration number and certain conditions are met. Under the new law, out-of-state antique dealers will be able to purchase goods in Maryland for resale without paying the sales tax (versus current law, under which they must pay the sales tax but may apply for a refund).

O. "One Maryland" Economic Development Credit (HB 1424)

The General Assembly clarified that tax-exempt organizations under Section 501(c)(3) or (4) of the Internal Revenue Code are included in the definition of "qualified business entity" for the purposes of the "One Maryland" economic development tax credits that are allowed for specified costs of economic development projects and specified start-up costs. The new law also provides that specified individuals and corporations with no tax liability may file an income tax return in order to claim a refund of the One Maryland tax credit.

P. Baltimore City: Special Tax Districts (SB 805)

As an additional economic development tool, the 2001 law authorizes Baltimore City to establish special tax districts. A "special tax district" is an area within a larger jurisdiction where the property owners request that certain infrastructure improvements be provided to them and in return agree to be assessed additional taxes. The city indicates that the special tax districts may in some instances be used to complement tax increment financing bonds to support an economic development project. The new law also authorizes Baltimore City to borrow money and issue bonds that will be repaid from special taxes levied within the special tax district.

For further information about any specific aspect of the tax law referred to in this article, please visit the Web site of the Maryland General Assembly at http://mlis.state.md.us, or contact the State Taxation Committee of the MACPA at (410) 296-6250, or the authors of this article:

Daniel F. McGuire, CPA, Esq.
Arthur Andersen LLP
Phone: (410) 246-3903
E-mail: Daniel.F.McGuire@US.ArthurAndersen.com
Adam J. Roa, Esq.
Arthur Andersen LLP
Phone: (410) 246-3847
E-mail: Adam.J.Roa@US.ArthurAndersen.com

This content has not yet been Rated.

To Rate content, please Login.