CPA-relevant issues dominate 2004 General Assembly

The budget shortfall dominated the 2004 session of Maryland's General Assembly. Slots, tax increases and various other plans to solve the state's fiscal woes sparked spirited debate among politicians and taxpayers alike.

But there was plenty of other action as well.

Legislators debated the merits of increasing vehicle registration and other fees (which was approved) and expanding a ban on indoor smoking to include bars and restaurants (which was defeated). Utility providers in Maryland now must use more clean energy from renewable sources, and lacrosse is now the state's official team sport. But efforts to reform medical malpractice, allow the importation of pharmaceuticals from Canada and increase taxes on alcohol and tobacco products all failed.

And potato chips and pork rinds won't come with an extra 5 percent sales and use tax; that proposal failed as well.

There was plenty to hold the interest of Maryland's CPAs, too.

This abbreviated summary of legislative action — compiled by Manis Canning & Associates may be of interest to MACPA members. For a more in-depth summary, visit the MACPA Web site at www.macpa.org/members/legisl/04wrapup.pdf.

H.B. 145: State Board of Public Accountancy — Grounds for Disciplinary Action

Under this bill, the State Board may deny a license to any applicant, reprimand any licensed public accountant, or suspend or revoke a license if the applicant or licensee:

has been sanctioned in another state in a matter relating to the practice of public accounting, or
has been sanctioned by a state or federal authority for acts or omissions directly relating to the fitness of the applicant or licensee to practice public accounting.

The MACPA supported this bill and played an active role in assisting in its passage.

S.B. 508: Budget Reconciliation and Financing Act of 2004

A cornerstone piece of legislation in this year's General Assembly session, this bill originally called for an increase the state's sales tax rate to 6 percent and expansion of the tax to include some services. Also under the original proposal, the state income tax rate for individuals who earn more than $150,000 and joint filers with more than $200,000 in income would have increased to 6 percent, making the combined state and local rate near or over 9 percent throughout Maryland. Car title fees would have increased to 6 percent.

The final version does not include increases in sales and individual taxes. It does call for several other items, including:

permanent decoupling from Section 179 deductions;
decoupling of depreciation treatment for sport utility vehicles (SUVs);
a $1 million threshold for estates subject to Maryland estate taxation (instead of the higher federal threshold); and
additional individual tax for non-residents who are currently not subject to localities' taxes.

The bill also modifies the time frame for the Comptroller's Office to hold unclaimed local income tax revenue in its local income tax reserve account from three years to one, and provides for a one-time distribution of $81 million each to the state and local jurisdictions in fiscal 2005.

In addition, S.B. 508 extends a reduction in the vendor sales tax credit for fiscal 2005 and 2006. To offset the expense of collecting and paying the state sales and use tax, vendors are allowed to retain a portion of the sales tax collected if they file their returns on a timely basis. This credit was halved for fiscal 2003 and 2004, and S.B. 508 extends that reduction.

Corporate income tax increase vetoed

The General Assembly passed H.B. 1188, calling for a 10 percent increase in Maryland's corporate income tax rate for 2004 to 2006. The revenue was dedicated to partially pay for a 5 percent cap on tuition increases at University System of Maryland institutions. The fiscal note indicated that the expected revenue did not cover the state's increased expense, thus widening the state deficit. The governor vetoed the bill on May 26.

Attempts to increase sales tax rate fail

In addition to the proposed amendments to S.B. 508, several other bills were introduced in an effort to increase the sales and use tax rate. H.B. 102, H.B. 103 and H.B. 271 would have increased the general sales and use tax rate from 5 to 6 percent to address the state's deficit and / or provide funding for the state's educational initiatives. All three bills failed.

Bid to tax services fails, too

H.B. 1364 would have applied sales and use taxes to a broader array of services, including cable television, automotive repair, barber and beauty shops … as well as tax preparation services and management consulting services. It failed to clear the House Ways and Means Committee.

H.B. 297: Office of the Comptroller — Tax Compliance — Holding Companies

This bill provides prospective changes to the corporate income tax law designed to prevent tax avoidance through the use of Delaware holding companies, by disallowing certain deductions. Closing such tax avoidance strategies is said to increase revenues by an estimated $37 million in fiscal 2005, with additional revenues increasing to $55 million in fiscal 2007 and thereafter. CPAs need to be aware that the bill's provisions apply to all interest expense and intangibles expense paid to any related party, not just to "Delaware holding companies." The governor allowed the bill to become law without his signature, but indicated his intent to seek amendments to remove the broad unintended consequences.

S.B. 187: Office of the Comptroller — Tax Compliance — Settlement Period

In conjunction with the prospective changes related to the use of Delaware holding companies , this bill creates a statutory settlement period for the comptroller to settle additional cases involving the issues that were addressed in the two Court of Appeals decisions, with provisions regarding reduction in penalties and interest, and limitation of the assessment period.

S.B. 320: The "flush tax"

This bill establishes a new fund to pay for upgrades to Maryland's sewage treatment plants. Households will be charged a new fee of $2.50 per month, while businesses will pay a fee based on the wastewater they generate. A fee calculator is available at www.mde.state.md.us.

S.B. 621: 'Living wage' expenses

Legislation was passed to require all employers with a state contract exceeding $100,000 in fees to pay their employees at least $10.50 per hour. Gov. Ehrlich vetoed this bill on May 26, citing the increased costs to the state for procurement contracts, potential increase in unemployment, and the exclusion of small businesses from the state procurement market.

Health care costs

Several bills would have imposed an employer payroll tax and a premiums tax on HMOs as a means for "expanding health care access" (S.B. 737 / H.B. 1008 and S.B. 715 / H.B. 1271). None of these provisions passed.

H.B. 679: Maryland Heritage Structure Rehabilitation Tax Credit Program

This bill re-establishes the Maryland Heritage Structure Rehabilitation Tax Credit but places the program under budgetary control, creating a competitive process (with an aggregate limit) for the awarding of commercial credits.

Tax credits

The General Assembly considered several proposals to extend the sunset dates for various tax credits that are scheduled to expire soon. One tax credit — the Job Creation Tax Credit, scheduled to expire after 2006 — was extended by three years in H.B. 219. However, legislators rejected several other proposals to extend existing credits beyond their current sunset dates. These include:

S.B. 754 / H.B. 218, which sought to extend the tax credit for employer-established paid work-based learning programs. Both bills failed.
H.B. 821, which sought to extend the tax credit for electric and hybrid vehicles that were titled before July 1, 2004. The bill failed.
H.B. 987, which failed to extend the Research and Development Tax Credit beyond its calendar 2004 deadline.
H.B. 1496, which sought to extend and expand the credit for renewable energy. The bill failed.
On the other hand, S.B. 485 and H.B. 714 were successful in their efforts to convert the Solar Energy Tax Credit into a grant program.

S.B. 69: Income Tax — Time for Filing Quarterly Income Tax Withholding Returns

This bill alters the due date for filing income tax withholding returns for employers who collect less than $700 per quarter in withholding taxes. The due date changes from the last day to the 15th day of the month that follows the calendar quarter in which the taxes are withheld.

H.B. 1000: Maryland Cancer Fund — Income Tax Checkoff

This bill establishes a Cancer Research Fund check-off on the individual income tax return form.

H.B. 1125: Task Force on the Exemption of Law Enforcement Officers' Pensions from Taxation

This bill creates a task force that will study the issue of exempting the following people from paying state income taxes on their pensions: members of the State Police Retirement System, the Law Enforcement Officers' Pension System and the Local Fire and Police System; members of any local pension or retirement system for law enforcement officers; and parole and probation officers who are members of the Employees' Retirement System or the Employees' Pension System.

Issues rising from Hurricane Isabel addressed

Two bills were passed to address property tax issues arising from the extensive damage done by Hurricane Isabel.

H.B. 216 is an emergency bill in response to Isabel to provide for the continuation of the Homestead Property Tax Credit for the current taxable year and two succeeding taxable years if a homeowner otherwise eligible for the credit does not actually reside in a dwelling for the required time period due to damage resulting from an accident or natural disaster even if the property has been removed from the assessment roll because of property damage due to an accident or natural disaster.
H.B. 435 calls for the extension of the special assessment of damaged or destroyed real property to all real property other than that used for commercial purposes.

Recordation and transfer taxes

H.B. 1 (the Public School Construction Assistance Act of 2004) tried to impose recordation and transfer taxes on the transfer of real property (with a value of $1 million or more) when the transfer is achieved through the sale of a "controlling" interest in a corporation, partnership, LLC, LLP or other form of unincorporated business. The bill failed.

On the other hand, S.B. 76 successfully extended a current exemption from recordation tax for the refinancing of a mortgage or deed of trust to the trustee of a living trust as long as the property is used as the principle residence of the settler of the trust and either the trustee or the settler originally assumed or incurred the debt being refinanced.

Looking ahead ...

Tort reform did not surface as an issue in 2004, but that is expected to change next year. In addition, numerous bills concerning workers' compensation were introduced and would have had an impact not only on CPA firms but a majority of the clients they represent. Due to the complexity of the bills and underlying court cases, legislators decided not to move forward on these issues but to wait and review them and, if necessary, address them next year.

The state is expected to face a deficit of between $800 million and $1 billion for fiscal 2006. Tax issues — including sales tax, increasing the base and various other revenue-enhancing measures — will likely surface again next year.

CPAs are encouraged to build relationships with legislators during the interim not only to defeat measures that would have a negative impact on the profession, but to help pass initiatives that would help the profession.