Tax bills, 'cascade' legislation top MACPA efforts in Annapolis

By Carol W. Kirwan, CPA
MACPA Director of Technical Services and Regulatory Affairs

The 2003 session of the Maryland General Assembly was as hectic as advertised, but not necessarily for the reasons Maryland CPAs thought it would be.

As the session neared, CPAs feared that the state's trial lawyers would renew their efforts to replace Maryland's contributory negligence doctrine with comparative fault, which would increase exposure to liability for CPAs and their clients. To the CPAs' relief, no such legislation was proposed this year.

Instead, the MACPA and its volunteers found themselves fighting some unexpected battles

Among them was Senate Bill 560, the "Corporate Accountability Act of 2003." This lookalike of the Sarbanes-Oxley Act of 2002 would have applied Sarbanes-Oxley reforms to publicly traded corporations in Maryland and added several provisions that would have affected all employers in Maryland. Thanks to hearty opposition by the MACPA and other groups, the bill was soundly defeated.

But more battles awaited the state's CPAs, many of them revolving around taxation.

Here's a rundown of this year's legislative activity of interest to Maryland CPAs.

S.B. 560: The Corporate Accountability Act of 2003

The bill would have (1) prohibited a registered public accounting firm from performing non-audit services for a securities issuer, and would have required five-year auditor rotation; (2) provided protections for whistleblowers, including a whistleblower hotline; and (3) required disclosure of all employees' salaries for any entity contracting with or receiving a grant from units of the state government; this information would have become part of the public record.

Although this bill was defeated in the Senate Finance Committee by a vote of 9-2, the danger that it presented was tremendous. Maryland is now the second state (behind New Mexico) to defeat cascade legislation. The good news is that Maryland's Board of Public Accountancy agreed to not support this legislation.

S.B. 560 brought an full-court press on the profession's part, with many MACPA members stepping up to help us. MACPA Chair Gray Smith and CEO Tom Hood braved the late-February blizzard to lead our testimony before the Senate Finance Committee. We provided written testimony from a variety of our members representing firms and corporations around Maryland. Tom Lantz, Barry Benjamin and Bob Tarola from the MACPA's Accounting Reform Task Force provided written testimony that we presented to the Senate Finance Committee. We rallied our key persons to contact the Senate Finance Committee and our lobbyist, Nick Manis orchestrated the full-court press.

Our Accounting Reform Task Force's white paper also was instrumental in showing the committee we had focused on the public interest as CPAs in Maryland. It was helpful having a position to show the senators without just opposing them. This will set a precedent to help other states as they deal with the "cascade effect." We have sent our testimony, white paper and letters to the other state CPA societies to help them in their efforts.

S.B. 188: Certified Public Accountancy — Limited Permits — Firm Ownership by Nonlicensees

The non-CPA ownership bill was signed into law on April 10, 2001. It permits an individual who is not licensed to practice as a CPA to have ownership in a CPA firm as long as a simple majority of the ownership (in terms of financial interests and voting rights) is held by licensed CPAs and the individual is an active participant. S.B. 188 would extend this law to a firm holding a limited permit for the practice of certified public accountancy by the State Board of Public Accountancy.

S.B. 188 passed with no opposition in the Senate and in the House. It is expected to be signed into law by Gov. Robert Ehrlich.

S.B. 116: Certified Public Accountants — Examination

This bill requires the State Board to adopt regulations that establish the passing score for the CPA licensing examination; authorizes the State Board to send specified examination answers to the AICPA by electronic transmission; and repeals the statutorily set passing score for the examination. S.B. 116 passed unanimously in the Senate and in the House. It is expected to be signed Gov. Ehrlich.

This bill is necessary for the DLLR to enact the computerized exam, which will be scored differently than the paper exam. The AICPA Board of Examiners has decided that the passing standard for the computer-based version of the Uniform CPA Exam will be set at 75. This however, does not represent "percent correct." Since CPA candidates receive different test forms, the percentage of questions a candidate needs to answer correctly to earn a score of 75 may differ from one test to another. The equivalence of the scores on different test forms is maintained through a psychometric procedure known as "equating."

The guidelines for granting credit on each section are as follows:

Candidates will be allowed to sit for each section of the exam individually, and in any order.
Candidates will retain credit for any section(s) passed for 18 months, without having to attain a minimum score on failed sections and without regard to whether they have taken other sections. Candidates will not be allowed to retake a failed section(s) within the same examination window.
Candidates must pass all four sections within a "rolling" 18-month period, which begins on the date that the first section(s) passed is taken.In the event all four sections are not passed within the rolling 18-month period, credit for any section(s) passed outside the 18-month period will expire and that section(s) must be retaken.

Corporate income tax bills

With the budget crisis in Maryland, a number of bills were introduced in this legislative session that were potentially harmful to businesses in Maryland.

The MACPA joined the Chamber of Commerce and other interested parties in testifying against these bills in hearings in the Senate and House, respectively. As a result, these bills did not receive favorable reports in their committees, which means they did not pass.

However, another potent tax bill, H.B. 753, did pass in the House but was modified significantly by the Senate. The MACPA provided information to members on the potential impact it would have on their business clients.

H.B. 753: Taxes and Revenues

The various provisions of the bill were highly contested and many amendments were proposed and rejected by both sides. For example, the original House version of the bill, titled "Taxes and Revenues," would have imposed a sliding scale with annual filing fees ranging from $400 to $20,000, depending on the number of employees in the company. The Senate's Budget and Taxation Committee significantly amended the proposed corporate filing fee to a flat fee of $250.

In the end, H.B. 753 was passed by both houses along with House Bill 935, "The Budget Reconciliation and Financing Act of 2003" (see summary below). Among the changes is an increased annual report filing fee of $300 for all business entities, including corporations, partnerships, LLCs and REITs, up from the current $100 applying to corporations.

In addition, H.B. 753 calls for the following:

A 10 percent surcharge on corporate income tax for years 2003, '04 and '05.
A "throwback" rule for all corporations. This provision would apportion to Maryland the receipts from the sale of tangible personal property to an out-of-state buyer if the corporate seller is not subject to income taxation in the state where the buyer is located.
An addback provision (i.e. disallowed deduction) for related party interest and intangibles expenses if the recipient is not subject to a state tax on the income; exceptions to the addback provision are biotech companies (no addback for intangibles) and banks and their related parties (exclusion from the interest expense addback).
A requirement to allocate all of a corporation's "nonoperational" income to Maryland if the principal place from which the corporation's trade or business is directed or managed is in Maryland.

The bill also grants the comptroller "Section 482" powers, authorizing the comptroller to reallocate income, deductions and credits among related organizations, trades or businesses; and provides that he is to follow the federal Section 482 regulations and cases. Note it does not include a retroactive provision as previously proposed. Additionally, the bill would subject HMOs to a 2 percent insurance premium tax.

The effective date is tax years beginning after Dec. 31, 2002.

Initial indications from Gov. Ehrlich's office are that he would include this bill in his promised veto of tax increase legislation.

H.B. 935: Budget Reconciliation and Financing Act of 2003

The following summary of H.B. 935 is provided by Karen T. Syrylo, CPA. With exceptions for certain provisions, the Act generally takes effect July 1, 2003.

1. Article 83B — Department of Housing and Community Development: Rehabilitation expenditures for commercial projects can only result in credits not exceeding $23 million for the period Feb. 1, 2003 to Dec 31, 2003. For 2004, the credits cannot exceed $15 million. Credits will be granted on a first-come, first-served basis.

2. Article — Business Occupations and Professions: Before a license or permit can be renewed, the issuing authority shall verify through the comptroller that the applicant has paid all undisputed taxes and unemployment insurance contributions. (See below for the same provision applicable to licenses and permits issued under other articles.)

3. Article — Business Regulation: Same as 2.

4. Article — Commercial Law, Section 9-525: $25 and $75 fees for filing and indexing certain records.

5. Article — Corporations and Associations, Section 1-203: Increased filing fees, including as follows (see statute for entire list):

Articles of incorporation and similar documents: $100
Registration of an entity name: $100
Registration of a partnership or LLC: $100
Annual report of a corporation: $300
Annual report of an LLC or partnership: $300
Annual report of a REITL: $300
The new annual report fees apply to reports filed after Dec. 31, 2003.

6. Article — Environment: Same as 2.

7. Article — Financial Institutions, Section 1-302: Financial records of customers can be disclosed to comptroller.

8. Article — Health Occupations: Same as 2.

9. Article — Natural Resources: Same as 2.

10. Article — Tax-General, Section 1-205: Same as 2.

11. Tax, Section 2-106: Total amount of income tax to be withheld is to be calculated without regard to the state income tax rates in Section 10-105(A)(1) to (3), the graduated rates on the first $3,000 of income. Effective Jan. 1, 2004.

12. Tax, Section 10-822: If quarterly withheld amount is $700 or more, monthly withholding returns are due; due date of the return is changed to the 15th day of each month following the month of withholding. Effective Jan. 1, 2004.

13. Tax, Section 10-905: If the comptroller notifies an employer that an employee has an unpaid tax liability, the employer shall base withholding for the employee on a number of exemptions not exceeding the actual number of exemptions allowed on the employee's prior year's income tax return, as specified by the comptroller.

14. Tax, Section 10-912 (new): In a sale or exchange of real property and associated tangible personal property owned by a nonresident or nonresident entity, the deed, etc., may not be recorded unless payment is made to the clerk of the Circuit Court or SDAT in an amount equal to 4.75 percent of the total payment to a nonresident, or 7 percent of the total payment to a nonresident entity.

A nonresident entity is an entity not formed under Maryland law, and is not qualified or registered with SDAT to do business in Maryland.
The transferor can get a certificate from the comptroller that a reduced amount of tax is due and state the reduced amount that should be paid to the clerk or SDAT.
The provision does not apply when a certificate is provided that the property is the transferor's principal residence.
The comptroller's regulations are to establish a procedure by which the transferor may apply for an early refund of the tax collected under this section if the transferor establishes that no tax will be owed or less tax than collected will be owed.
Effective Oct. 1, 2003.

15. Tax, Section 11-501: Due date for sales/use tax returns is changed from the 21st day to the 20th day of the month.

16. Tax, Section 13-104: Tax liability is to be paid with immediately available funds if the amount of tax due with the return, report or other document, including withholding return, is $10,000 (changed from $20,000).

17. Tax, Section 13-203: The comptroller can disclose tax information to any license issuing authority of the state.

18. Tax, Section 13-602 and 13-702: To avoid penalty, estimated tax payments must now be either 90 percent of tax shown on the return or 110 percent of prior year's tax (changed from 100 percent of prior year's tax). For tax years beginning after Dec. 31, 2003.

19. Tax, Section 13-803 (new): For contracts entered into on or after July 1, 2003, any person doing business with a nonresident contractor (one who does not maintain a regular place of business in the state) of $50,000 or more shall withhold 3 percent of the contract price until 30 days after the contractor:

completed the contract;
requested in writing for the comptroller to issue a tax clearance certificate; and
provided a receipted copy of the request to the person required to withhold the payment.

If taxes are due from the contractor, the withholder pays the withholding to the comptroller.

20. Tax, Section 13-804 (new): The comptroller can request from a financial institution information and assistance to enable the comptroller to enforce the tax laws of the state. Effective Oct. 1, 2003.

21. Tax, Section 13-811: A tax lien for any tax administered by the comptroller under this article extends to and covers all salary, wages, or other compensation for personal services that is due or becomes payable on or after the time the lien arises (more than just income tax wage lien).

22. Tax, Section 13-812 (new): The comptroller can send notice of a tax lien to any financial institution that the comptroller reasonably believes holds property subject to a tax lien; on receipt of the notice from the comptroller, the financial institution promptly shall seize and attach from one or more of the accounts of the obligor held by the financial institution an aggregate amount equal to the lesser of the total of the amounts in all accounts of the obligor held by the financial institution, or the amount stated in the comptroller's notice. Effective Oct. 1, 2003.

23. Article — Transportation, Section 1-103: Same as 2.

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