Manufacturing tax incentives in Maryland

By Cindie S. Rosenzweig, CPA, MS
Hertzbach & Company, P.A.
Member, MACPA State Tax Committee

Like many states, Maryland uses tax incentives to encourage businesses that perform manufacturing and production activities to locate in the state.

Maryland has several tax incentives to attract manufacturers. One is a sales and use tax exemption for items used or consumed in manufacturing, assembling, processing or refining products for sale. Property covered by the exemption include the following (Reg. 03.06.01.32-2; Business Tax Tip No. 9):

Any tangible personal property used directly and predominantly in a production activity in any stage of operation on the production activity site — from handling raw materials or components to moving the finished product.
Foundations to support other machinery and equipment or an item required to conform to air or water pollution laws and normally considered part of real property.
Safety equipment used in production activity.
Quality control machinery used in a production activity site.
Machinery used to produce bituminous concrete.
Certain specified equipment used in aluminum production.

Production activity for the purposes of the manufacturing exemption includes the following (Sec. 11-101(d), Tax General Art.):

Assembling, manufacturing, processing or refining tangible personal property for resale.
Generating electricity for sale or use in another production activity.
Laundering, maintaining or preparing textile products for rental.
Producing or repairing production machinery or equipment.
Establishing or maintaining clean rooms or clean zones as required by certain federal guidelines.

The exemption generally does not apply to fabrication (which typically is considered a taxable service) and the production of special orders as defined in Reg. 03.06.01.30(A) or new items as defined in Reg. 03.06.01.30(C).

The exemption was phased in over a two-year period. During the phase-in period taxpayers were required to pay the sales and use tax with the purchase of the applicable property and subsequently apply for a credit of the sales tax paid. From July 1, 1998 through June 30, 1999, the credit was equal to one-third of the sales and use tax paid. From July 1, 1999 through June 30, 2000, the credit was equal to two-thirds of the sales and use tax paid. Taxpayers have four years from the due date of the sales and use tax return for the period in which the sales tax was paid to claim the credit. Purchases of the applicable property made after June 30, 2000 are totally exempt from the sales and use tax. Accordingly, taxpayers should claim a manufacturer's exemption and not pay the sales tax upon purchase of the property. See Business Tax Tip No. 9 for more details. The Tax Tip can be found on the Comptroller of Maryland's Web site — www.marylandtaxes.com.

Personal property used in a manufacturing or production process or research and development may qualify for a Maryland personal property exemption. Taxpayers must apply to the state Department of Assessments and Taxation in order to qualify for the exemption. Information about the personal property exemption, as well as the application, can be found on the state Department of Assessments and Taxation's Web site — www.dat.state.md.us.

Effective for tax years beginning after Dec. 31, 2000, multi-state manufacturing companies doing business in Maryland are required to use a single sales factor formula to apportion income to Maryland. In addition, certain taxpayers using the single sales apportionment factor formula are required to calculate and report the difference in their tax liability resulting from the use of the single sales apportionment factor formula as compared to the use of the traditional three factor formula used prior to taxable years beginning before Jan. 1, 2001. This change should generate a tax benefit for multi-state manufacturing companies headquartered in Maryland.

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