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Overhaul of Maryland's State Tax System and Rates
January 4, 2008
Maryland General Assembly passes and Governor O'Malley signs into law bills overhauling Maryland's state tax system and rates.
November 19, 2007 was the day Maryland Governor O'Malley signed into law two bills passed by the General Assembly after what had been a legislative special session debated as much on the floors of the Miller Senate Building and the House Office Building as in the media. Following is a brief list and explanation of the major changes enacted by our Maryland legislators and executive. This list is by no means exclusive. Additionally, with delayed effective dates of many new provisions, the bills enacted in November, 2007 may be further modified, or deleted in part, prior to the stated effective dates of certain provisions.
Please contact an experienced tax attorney or accountant before relying on anything contained in this memorandum.
Personal Income Tax
1. The income tax rates and brackets beginning tax year 2008 have been modified to a more progressive structure and are as follows:
Rate: 2.00%
Individual Taxable Income Exceeds: $1.00
Joint Taxable Income Exceeds: $1.00
Rate: 3.00%
Individual Taxable Income Exceeds: $1,000.00
Joint Taxable Income Exceeds: $1,000.00
Rate: 4.00%
Individual Taxable Income Exceeds: $2,000.00
Joint Taxable Income Exceeds: $2,000.00
Rate: 4.75%
Individual Taxable Income Exceeds: $3,000.00
Joint Taxable Income Exceeds: $3,000.00
Rate: 5.00%
Individual Taxable Income Exceeds: $150,000.00
Joint Taxable Income Exceeds: $200,000.00
Rate: 5.25%
Individual Taxable Income Exceeds: $300,000.00
Joint Taxable Income Exceeds: $350,000.00
Rate: 5.50%
Individual Taxable Income Exceeds: $500,000.00
Joint Taxable Income Exceeds: $500,000.00
2. The personal exemptions have been increased for lower and middle income earners while being maintained or reduced for higher income earners, and the breakdown is as follows:
Exemption Amount: $3,200.00
Individual Federal Adjusted Gross Income: From $1.00 up to $100,000.00
Joint Federal Adjusted Gross Income: From $1.00 up to $150,000.00
Exemption Amount: $2,400.00
Individual Federal Adjusted Gross Income: From $100,001.00 up to $125,000.00
Joint Federal Adjusted Gross Income: From $150,001.00 up to $175,000.00
Exemption Amount: $1,800.00
Individual Federal Adjusted Gross Income: From $125,001.00 up to $150,000.00
Joint Federal Adjusted Gross Income: From $175,001.00 up to $200,000.00
Exemption Amount: $1,200.00
Individual Federal Adjusted Gross Income: From $150,001.00 up to $200,000.00
Joint Federal Adjusted Gross Income: From $200,001.00 up to $250,000.00
Exemption Amount: $600.00
Individual Federal Adjusted Gross Income: Greater than $200,000.00
Joint Federal Adjusted Gross Income: Greater than $250,001.00
3. Beginning tax year 2008, the refundable earned income tax credit has been broadened to include all taxpayers, not just those with dependents, and has been increased to 25% of the federal earned income tax credit.
4. For tax year 2008 only, the safe harbor from underpayment of estimated tax payments required to be paid by certain non-corporate taxpayers is increased from 110% to 120% of the tax paid for the prior taxable year.
Sales Tax
1. Effective January 3, 2008, the general rate of sales tax is increased from 5% to 6%.
2. Effective from July 1, 2008 through June 30, 2013, the definition of "Taxable service" is expanded to include "Computer services." Taxable "Computer services" is defined to include the following: (i) computer facilities management and operation; (ii) custom computer programming; (iii) computer system planning and design that integrate computer hardware, software, and communication technologies; (iv) computer disaster recovery; (v) data processing, storage, and recovery; and (vi) hardware or software installation, maintenance, and repair. Further, the definition of "Computer services" expressly excludes the following: (r) "internet access", as defined in the Federal Internet Tax Freedom Act; (s) typing or data entry on word processing equipment; (t) computer training; (u) the installation, maintenance, or repair of tangible personal property other than computer hardware or software that includes computer hardware or software as a component part; (v) services provided in connection with electronic fund transfers, financial transactions, automated teller machine transactions, or other banking or trust services; (w) services provided in connection with business management, account management, personnel, payroll, employee benefit, or other administrative services; (x) services provided in connection with educational, legal, accounting, architectural, actuarial, medical, medical diagnostic, or other professional services; (y) telecommunications services; and (z) use of computer services by an individual participating in a home school program.
3. From January 3, 2008 through June 30, 2011, the credit allowed a vendor for the expense of collecting and paying sales and use tax, and who timely files a sales and use tax return, is capped at $500.00 per return. This limit also applies to vendors who file a consolidated return.
4. Effective January 1, 2008, the titling tax for motor vehicles is increased from 5% to 6%. The new law, however, provides for an allowance to reduce the "total purchase price" by the amount of any trade-in. This tax is equivalent to a sales tax on motor vehicles.
5. Effective January 1, 2008, the fee for a certificate of title to a motor vehicle is increased to $50.
6. Vendors may assume or absorb all or any part of the sales tax for customers, provided that the amount of tax due is reflected on sales invoices regardless of whether the vendor requires customers to pay the tax.
7. Beginning in 2011, from the Saturday immediately preceding the third Monday in February to the third Monday in February, the sales tax shall not apply to the following items: "Energy Star" air conditioners, clothes washers or dryers, furnaces, heat pumps, standard size refrigerators, compact fluorescent light bulbs, dehumidifiers, programmable thermostats or any solar water heater.
8. Beginning in 2010, from the second Sunday in August through the following Saturday, the sales tax shall not apply to clothing and footwear sales of items priced $100 or less. This exemption does not apply to sales of accessories, including jewelry, watchbands, handbags, scarves, ties, belt buckles, etc
9. The total combination of admissions and amusement tax with the sales tax charged may not exceed 11%. This relates to transactions subject to both taxes and provides for the increased sales tax without reducing the amount of admissions and amusement tax collected.
Corporate Income Tax
1. Effective for tax years beginning January 1, 2008, the state income tax rate for corporations is increased from 7% to 8.25%.
2. A Maryland Business Tax Reform Commission has been created to perform the following functions: (i) review and evaluate the state's current business tax structure; and (ii) make specific recommendations regarding changes to the corporate tax rates, tax base broadening measures, measures to address tax avoidance strategies, and elimination of ineffective tax policies intended as economic development incentives. The commission shall, at a minimum, study the effect of imposition of combined reporting using the "water's edge method" and of imposing gross receipts taxes, value added taxes and alternative minimum taxes. Composing the Commission shall be 17 individuals, including 1 chair appointed by the Governor, 3 members each from the state Senate and House, 7 members from various state agencies, state Chamber of Commerce and local government, and 3 members of the public appointed by the Governor who are either attorneys or accountants. The Commission shall submit an interim report of findings and recommendations by December 15, 2010, and a final report by December 15, 2011.
3. Any manufacturing corporation with more than 25 employees and that apportions its income under the "single sales factor apportionment method" as opposed to the "3-factor double weighted sales factor apportionment method" must, for tax years beginning after December 31, 2005, provide a report to the state Comptroller detailing the difference in tax owed as a result of using the "single sales factor" method instead of the "3-factor double weighted" method, its volume of sales in Maryland and worldwide, its taxable income in Maryland and worldwide, and the book value of its plant, land and equipment in Maryland and worldwide. Subsequently, by December 1, 2008 and December 1 of each succeeding year, the Comptroller shall submit to the Governor and General Assembly a report outlining the aggregate results of the manufacturing corporations' reports.
4. Any "corporate group" that is "doing business in the state" is now required, for tax years beginning after December 31, 2005, to electronically file with the Comptroller the following: (i) a statement identifying each member of the corporate group, including whether each member filed a Maryland income tax return, the volume of worldwide sales by the member for that taxable year and the volume of Maryland sales by the member for that taxable year; and (ii) a statement identifying each state other than Maryland in which any member of the corporate group filed a return, and a listing of all members of the corporate group included in a "combined" or "consolidated" group for purposes of tax return filings in any state requiring combined or consolidated reporting for corporate income taxpayers. Publicly traded corporations doing business in Maryland are required to provide additional information, including general corporate ownership and business information, as well as the difference in Maryland income tax that would be owed if the taxpayer were required to use combined reporting using the "water's edge" method, and various other information as required by the Comptroller. Following compilation of all submitted information, the Comptroller shall provide a report to the Governor and the General Assembly summarizing and analyzing the submitted information.
5. For tax year 2008 only, the safe harbor from underpayment of estimated tax payments required to be paid by certain corporations is increased from 125% to 130% of the tax paid for the prior taxable year.
"Controlling interest" tax
1. Beginning July 1, 2008, the transfer and recordation of any "controlling interest" in a "real property entity" will be taxable as if the real property owned by the "real property entity" were being conveyed outright.
2. For purposes of these new recordation and transfer taxes, "controlling interest" means greater than 80% of (i) the total value of stock of a corporation, (ii) the total interest in capital and profits of any other business entity, or (iii) the beneficial interest in a trust; and "real property entity" means any type of business entity or trust that directly or beneficially owns real property that constitutes more than 80% of the value of the entity's assets and has an aggregate value of more than $1,000,000.00.
3. Real property entirely subject to an agricultural use assessment is excluded from taxation under these new transfer and recordation tax provisions.
4. The "real property entity" must file a report with the State Department of Assessments and Taxation providing information regarding transfer consideration, non real property assets and claimed exemptions from these "controlling interest" taxes.
Tobacco tax
1. Effective January 1, 2008, the tobacco tax has been doubled to $1.00 for each package of 10 or fewer cigarettes, and to $2.00 for each package of up to 20 cigarettes.
2. This increased tax applies to cigarettes possessed for retail sale on January 1, 2008 that still bear the $1.00 (or other) tax stamp, and the method of collection of the tax is to be determined by the Comptroller.
This memorandum is intended to highlight many of the changes enacted by the General Assembly and Governor, but is not an exhaustive list. This memorandum was prepared by Robert A. Snyder, Esq. and William F. Herrfeldt, Jr., Esq., both of Thomas & Libowitz, P.A. in Baltimore. Please feel free to contact either of them with questions regarding these significant changes.
Robert A. Snyder
Thomas & Libowitz, P.A. - 100 Light Street, Suite 1100 - Baltimore, Maryland 21202
Main: (410) 752-2468 - Direct: (443) 927-2109
rsnyder@tandllaw.com
William F. Herrfeldt, Jr.
Thomas & Libowitz, P.A. - 100 Light Street, Suite 1100 - Baltimore, Maryland 21202
Main: (410) 752-2468 - Direct: (443) 927-2107
wherrfeldt@tandllaw.com
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