New reporting requirements hit corporations hard

By Beverly A. Richard, CPA, MST

Corporations were hit hard in the special legislative session round of tax increases. They are directly affected through rate increases, sales tax rate increases, limited sales tax vendor discounts, additional costs on computer services purchases, recordation taxes and vehicle titling taxes.

In addition to these direct financial costs, the cost of tax compliance will increase due to intense reporting disclosures imposed during this special session. These disclosures are the most extensive in the nation and have been described as “burdensome,” “onerous” and even “draconian.”

Although Maryland lawmakers did not impose combined reporting during the special session, they did create a new 17-member tax reform commission to study tax proposals including, but not limited to:

combined reporting;
other business taxes such as gross receipts, value added tax and alternative minimum taxes; and
evaluation of the effectiveness and efficiency of tax policies intended as economic development incentives.

The new information reporting disclosures will be used to help evaluate tax proposals such as those above. These annual reporting requirements affect public and non-public companies and are retroactive to the 2006 tax year.

The Comptroller’s Office will be preparing for these new electronic filing requirements. Absent any legislative changes to the law during the 2008 regular session, the Comptroller’s Office currently anticipates having an electronic system in place by summer 2008. The Comptroller’s Office has indicated that there will be a very short window for filing the 2006 and 2007 data. The comptroller will collect the data from the corporations, analyze the information, and then submit detailed reports to the governor and General Assembly by Dec. 1 of each year.

Reporting requirements

Manufacturers: Manufacturers with more than 25 employees must return to reporting the difference in Maryland tax between using the single factor apportionment and three-factor double weighted sales apportionment. They also must report:

Maryland and worldwide sales;
Maryland and worldwide taxable income; and
Maryland and worldwide book value of plant, property and equipment.

Corporate groups: Each corporation that is a member of a corporate group must file a statement identifying all members of the corporate group regardless of the members’ connection, or lack of connection, to Maryland. Each member must state:

whether the member filed a Maryland income tax return;
worldwide sales volume;
Maryland sales volume;
in which states they file; and
what entities are included in any state combined or consolidated filings.

Publicly traded corporations: Publicly traded corporations doing business in Maryland are also subject to reporting requirements. These include:

name and street address of principal executive office;
name and address of corporations owning 50 percent or more of the voting stock;
NAICS classification code;
information specified by the comptroller used in preparing tax returns, or which would have been used in the preparation had a return been required. Alternatively, they may submit an explanation why they are not required to file and the volume of Maryland gross receipts.

Publicly traded corporate groups with $100 million worldwide gross receipts: The reporting requirements are more rigorous for publicly traded corporations that are members of a corporate group having worldwide gross receipts over $100 million. They must submit the information outlined above for all members of the corporate group irrespective of whether or not the member is doing business in Maryland or is required to file an income tax return.

Further, the corporation must provide “other information as specified by the comptroller” for each member of the group, including:

the members of the corporate group and the difference in Maryland tax, which would be included in a hypothetical water’s edge combined report;
the hypothetical sales factor and difference in Maryland tax if there was a sales throwback rule adding the following sales to Maryland’s numerator: (a) the federal government, or (b) to a purchaser in a state where the seller is protected from taxation;
for any non-apportionable income on any state return, (a) the amount and source of the income, (b) the state allocated the income; and (c) if Maryland is the place of the principal executive office, the difference in Maryland tax if Maryland required 100 percent allocation of the income;
the number of full-time equivalent employees on the last day of the taxable year, and the three previous years;
for U.S. corporations or affiliates of U.S. corporations, the profits before tax reported to the Securities and Exchange Commission.

The reporting requirements also carry severe penalties for failure to comply. The willful failure to file, or the filing of a false statement, is a misdemeanor subject to $10,000 fine and / or five years in prison.

The MACPA and its State Tax Committee are communicating with the Comptroller’s Office on these reporting requirements. We will continue to inform you of any new developments or guidance as it becomes available.

The MACPA’s State Tax Committee welcomes you to become involved in our efforts. Please join us in our legislative efforts, liaison meetings with the State of Maryland, education and great networking.

Beverly A. Richard, CPA, MST, is chair of the MACPA’s State Tax Committee and tax manager at SC&H Tax and Advisory Services, LLC.

Contact this Author: < Beverly Bareham > bbareham@scandh.com

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