What's new in Maryland taxes?

MACPA's State Tax Committee gets details during annual meeting with Comptroller's Revenue Administration Division

By Beverly A. Richard, CPA, MST

On Nov. 1, 2005, 17 members of the MACPA's State Tax Committee met with representatives of the Maryland Comptroller's Revenue Administration Division (RAD). The meeting was followed by a brief discussion with Deputy Comptroller Steve Cordi.

The State Tax Committee meets annually with the Revenue Administration Division, as well as with the Compliance Division, the state Department of Assessments and Taxation and the Office of Unemployment. These meetings provide networking opportunities with key government representatives and other Maryland CPAs.

The representatives from the Comptroller's Office are wonderful resources to help resolve client issues and answer questions. The relationships formed at the meetings are invaluable to our members. Of course, we hope our real-life, practical feedback regarding legislation, forms and instructions is helpful to the state. Discussions generated by the meetings have produced tangible results in terms of open dialogue on tax issues, proposed legislation, and clearer forms and instructions.

The topics discussed with the Revenue Administration Division include contact information, recent law changes and court cases, forms changes and procedural changes. Additionally, the committee solicits members' questions to pose to RAD prior to the meeting. RAD researches the questions and provides complete answers to the questions in writing and through discussion at the meeting.

The discussion with Mr. Cordi was a productive exchange of ideas. He was receptive to the committee's proposal to disseminate additional information to tax practitioners via e-mail. Mr. Cordi suggested beginning by utilizing the e-mail list from the ReveNews newsletter. You can register to receive ReveNews by e-mail at the Comptroller's Web site, taxpros.marylandtaxes.com.

Highlights of the meeting

Meeting handouts and additional details are available here. (Note: This file is very large; it may take a few moments to download.)

Tax preparer penalties: There has been a long-standing requirement that tax preparers sign the returns they prepare and provide their identification number (PTIN or SSN). Previously, there had not been any consequence for non-compliance. Senate Bill 69 now provides for a $50 penalty for failure to sign a return and another $50 penalty for failure to furnish an identifying number. These preparer penalties are per occurrence and can accumulate up to a maximum of $25,000 each. The penalties can be waived for reasonable cause.
Employer withholding: Provisions in Senate Bill 95 allow the Comptroller to notify a taxpayer's employer that the taxpayer has failed to file a Maryland income tax return. Once notified, the employer must withhold income taxes based on one exemption.
R&D tax credit: The Research and Development Tax Credit has been extended. The time in which the credit may be earned is extended from 2005 until 2010, with a sunset date of June 30, 2012. The carryforward provision has been reduced. Taxpayers can carry forward unused credits for 15 years provided they are certified prior to July 1, 2005. However, credits certified after July 1, 2005 may be carried forward only for seven years.
Related entity addback — foreign taxes: Certain interest and intangible expenses between related entities must be added back for Maryland taxable income purposes unless an exception is met. One exception to the addback requirement is if the transaction is subject to an "aggregate effective tax rate" of at least 4 percent. For tax years beginning after Dec. 31, 2004, foreign taxes are now considered in the 4 percent tax calculation. It is not retroactive to prior years.
Sales and use tax — tax-free shopping: The period of Aug. 23-27, 2006 will be tax-free back-to-school shopping days. During this time period, clothing and footwear purchases of $100 or less will not be subject to sales and use tax. Accessory items will continue to be taxable.
Social Security numbers: House Bill 56 provides for many new privacy measures regarding the use or display of Social Security numbers. Generally, this will not have a tax implication. However, the Comptroller's Office is reviewing mailed correspondence and notices to determine how and when Social Security numbers can be removed. SSNs will still be required on all tax returns. The Comptroller "recommends" including the SSN on any payments. However, this inclusion is no longer mandatory.
Pass-thru entity tax: Pass-thru entity tax remitted on behalf of non-resident individuals is increased to 6 percent. Additionally, the tax now also applies to non-resident entities, with limited exceptions. The tax rate on fiduciaries is 6 percent, and 7 percent for all business entities. A "non-resident entity" is one that is not formed under Maryland law and is not qualified by or registered with SDAT to do business in the state. These provisions are effective for tax years beginning after Dec. 31, 2004. Significant changes have been made to the Form 510 to assess the tax and to various other forms to reflect the credit for tax paid.
Eligible roll-over distributions: Any eligible rollover distribution subject to mandatory federal income tax withholding is now also subject to mandatory Maryland tax withholding at a rate of 7.75 percent.
Non-resident sales of real property: Sales of Maryland real property by a non-resident are subject to 6 percent withholding effective July 1, 2005. The previous rate was 4.75 percent. Regulations were also finalized on this subject.
Section 199 production deduction: Maryland requires a permanent addback of any amounts deducted under IRC §199 "production deduction" applicable to all tax years beginning after Dec. 31, 2004. The new addition modification code "O" is to be used for the add back on Form 502.
Biotechnology Investment Incentive Act: House Bill 664 created a new refundable income tax credit for investments in qualified biotechnology firms. The credit is 50 percent of the investment up to $50,000 for individuals, or $250,000 for corporations. At the time of this writing, the tax credit reserve is unfunded, and accordingly, the tax credit has not been implemented.
Extensions: Following the new federal extension change from four months to six months, Maryland now offers an automatic six-month extension to file Maryland 502, 503, 505 and 515 returns. Tax due must still be remitted by April 17, 2006 on Form 502E. The extension is automatic if a federal extension is filed. Form 502E may be used to request a Maryland extension when no federal extension is requested. Administrative Release No. 4 regarding extensions has been completely rewritten.
Bar codes: Maryland requests that taxpayers be cautious to not write on, staple or punch holes in the 2D bar code on the returns. Additionally, if you use the 2d bar code system, do not make any handwritten changes to the return, such as adding direct deposit information. The modified information will not be incorporated into the bar code and accordingly will not be processed.
Electronic filing: Corporations are allowed to electronically file their returns this year.
Upcoming legislation: We anticipate legislation from the Governor's Office designed to encourage more electronic filing. The proposal would extend the April 15 payment deadline to April 30 for electronic filing only. The returns would continue to be due on April 15 and the extended payment date would apply only to taxpayers who both file electronically and pay by electronic means such as credit card or direct debit. The proposal would not be effective this filing season.

Beverly A. Richard, CPA, MST, of Clifton Gunderson LLP, is a member of the MACPA's State Tax Committee.

Contact this Author: < Beverly Richard > brichard@scandh.com

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