Maryland enacts income and sales tax relief

On Feb. 15, 2021, Maryland enacted the Recovery for the Economy, Livelihoods, Industries, Entrepreneurs, and Families (RELIEF) Act to provide payments to taxpayers as well as income tax and sales tax relief in response to the COVID-19 pandemic.¹ This bipartisan legislation which had been requested by Gov. Larry Hogan provides more than $1 billion in targeted tax relief and economic stimulus for families and small businesses.² For the 2020 and 2021 tax years, the legislation allows corporate and personal income tax subtractions for pandemic relief payments. Also, the legislation provides for tax-exempt economic impact payments to individuals who claimed the earned income tax credit (EITC) for the 2019 tax year. For the 2020 and 2021 tax years, certain individuals may subtract unemployment benefits from their income. The legislation allows certain vendors to retain a temporarily increased sales and use tax vendor credit. Finally, the legislation amends the elective pass-through entity (PTE) tax regime originally adopted by Maryland last year

Payments and income tax relief

For taxable years beginning in 2020 or 2021, a subtraction for corporate and personal income tax is provided for a pandemic relief payment, including any amount of a pandemic relief loan that has been forgiven, received by the person during the tax year.³ Qualifying relief payments include a federal, state or local government grant or loan for which a person applied on or after March 5, 2020, and provided to the person for the purpose of assisting with the economic hardships resulting from the pandemic.⁴

Economic impact payments

As soon as practicable, the state is directed to make economic impact payments to individuals who received a state EITC in 2019.⁵ The one-time payment will be $300 for people filing individual income tax returns and $500 for joint filers, heads of households or surviving spouses. No application is required to receive the payment. For taxable years beginning in 2021, a personal income tax subtraction is provided for the state economic impact payment.⁶ However, guidance from the Comptroller notes that the payments may be subject to federal income tax.⁷

Unemployment insurance benefits

For taxable years beginning in 2020 or 2021, a personal income tax subtraction is provided for unemployment insurance benefits if the individual’s federal adjusted gross income for the taxable year does not exceed $75,000 ($100,000 for joint filers, heads of households or surviving spouses). ⁸

Increased refundable EITC

Individuals who claim the federal EITC may be eligible for a refund of a percentage of this amount on their Maryland returns.⁹ As amended, the applicable percentage to be used to determine the refund for the taxable year is increased from 28% to 45% for taxable years beginning in 2020, 2021, or 2022.¹⁰ For taxable years beginning in 2020, 2021, or 2022, the state EITC for an individual without a qualifying child equals 100% of the credit allowed under IRC Sec. 32. However, the credit may not exceed $530 for a taxable year.¹¹

Sales and use tax relief

A vendor is allowed a credit against the gross amount of sales and use tax for sales during the months of March, April, and May 2021 if, for that month: (i) the vendor timely files a sales and use tax return or consolidated return; and (ii) the gross amount of sales and use tax that the vendor is required to pay with the return does not exceed $6,000.¹² The credit is equal to the lesser of: (i) the sales and use tax collected during the month for which the vendor qualifies for the credit; or (ii) $3,000. Therefore, the credit may not exceed $9,000 in three months. A vendor must forgo the standard vendor credit in order to claim the enhanced vendor credit.¹³ The credit is taken by reducing the gross amount of sales and use tax that the vendor is required to pay by the amount of the credit. This credit does not apply to a sale by a marketplace seller.

PTE tax amendments

For taxable years beginning in 2020 and thereafter, the RELIEF Act amends several elective PTE tax provisions.¹⁴ Under Maryland law, a PTE: (i) pays the tax with respect to the distributive shares or pro rata shares of the nonresident and nonresident entity members of the PTE (“nonresident entity tax”); or (ii) may elect to pay the tax with respect to the distributive shares or pro rata shares of all (previously, resident) members of the PTE.¹⁵ For a PTE that elects to pay the tax with respect to all members, the tax is treated as a tax imposed on the PTE itself.¹⁶

If the PTE only pays the nonresident entity tax and does not elect to pay the tax with respect to all members, several rules are clarified. In such case, the nonresident entity tax does not apply with respect to the distributive share or pro rata share of a member that is itself a PTE formed or registered to do business in Maryland.¹⁷ Furthermore, if such election is not made, the nonresident entity tax does not apply with respect to the direct or indirect distributive share or pro rata share of a member that is a real estate investment trust under IRC Sec. 856 or a tax-exempt entity under IRC Sec. 501.¹⁸ Finally, the nonresident entity tax does not apply to a publicly-traded PTE that has agreed to file an annual information return with the Comptroller for each nonresident or nonresident entity member whose distributive share or pro rata share of the PTE’s nonresident taxable income for the taxable year exceeds $500.¹⁹ Prior to amendment, these three exceptions applied to the payment of tax regardless of whether the PTE tax election was made.

As amended by the RELIEF Act, a corporate and personal income tax addition is provided for the credit claimed for the amount of tax paid by a PTE attributable to the member’s share of tax on the PTE’s taxable income.²⁰

Commentary

The Maryland RELIEF Act was enacted less than a month after Gov. Hogan requested the bill to be introduced into the Maryland legislature, with broad bipartisan support, in order to provide welcome assistance to individuals and small businesses dealing with the economic ramifications of the pandemic. Both individuals and businesses are provided with a subtraction for the 2020 and 2021 tax years for pandemic relief payments. Also, targeted individuals are provided with economic impact payments as well as temporary subtractions and enhancements that should provide financial relief. Certain small businesses should benefit by receiving an enhanced sales and use tax vendor credit for three months. All of the components of the RELIEF Act are projected to provide over $1 billion of assistance to Maryland taxpayers. The Comptroller has already issued considerable administrative guidance to assist taxpayers in receiving these benefits.

For taxable years beginning in 2020 and thereafter, the legislation makes changes to correct and clarify some of the PTE tax provisions adopted last year.²¹ Since 1991, Maryland has imposed a tax on PTEs based upon each PTE’s nonresident owners’ pro rata or distributive share of each PTE’s nonresident taxable income. In 2020, Maryland expanded this provision to allow PTEs to elect to pay tax with respect to either the nonresident or resident members of the PTE. This elective tax produces a workaround to the $10,000 state and local tax deduction cap that has been imposed on individuals for federal income tax purposes since the 2018 tax year. Despite the language added in 2020 that allows a PTE to elect to pay tax for its “resident” owners, the computation of tax under the election requires taxpayers to compute the tax for all members of the PTE. Thus, the amendment in the RELIEF Act to the election provision that changes “resident” to “all” members of the PTE is a technical clarification.

The most significant aspect of the recent amendments to the PTE tax is the new addition for members for the amount of tax paid by the PTE and attributable to the member’s share.²² As originally enacted, the PTE tax election was intended to be a revenue-neutral mechanism to avoid the federal state and local tax deduction cap. However, as adopted, the PTE tax regime was not revenue-neutral because the members would have received a deduction on their federal income tax returns that would have also reduced their Maryland taxable income. By enacting the addback, the members will continue to receive the federal income tax benefit, but not the additional unintended Maryland income tax benefit.

1 Ch. 39 (S.B. 496), Laws 2021; Tax Alert: Maryland RELIEF Act, Maryland Comptroller, Feb. 16, 2021. The Maryland Comptroller has provided detailed information about the various relief provisions at RELIEF Act Information.
2 Press Release, Office of Maryland Governor, Feb. 15, 2021. For a brief summary of the legislation, see RELIEF Act of 2021.
3 MD. CODE ANN., TAX-GEN §§ 10-207(jj); 10-307(g)(6). The Comptroller’s website provides a list of pandemic relief payments eligible for the subtraction.
4 Id.
5 S.B. 496, § 6; Maryland Economic Impact Payment: FAQs, Maryland Comptroller, Feb. 2021. The Maryland Comptroller announced that 98% of the economic impact payments to individuals would be processed by Feb. 19, 2021. News Release, Maryland Comptroller, Feb. 16, 2021.
6 MD. CODE ANN., TAX-GEN § 10-207(kk).
7 Tax Alert: Maryland RELIEF Act, Maryland Comptroller, Feb. 16, 2021.
8 MD. CODE ANN., TAX-GEN § 10-208(y); Unemployment Assistance FAQs, Maryland Comptroller, Feb. 2021.
9 Tax Alert: Maryland RELIEF Act, Maryland Comptroller, Feb. 16, 2021.
10 MD. CODE ANN., TAX-GEN § 10-704(b)(2)(ii). The percentage returns to 28% for taxable years beginning in 2023 and thereafter.
11 MD. CODE ANN., TAX-GEN § 10-704(b)(3). A refund may be claimed for excess credits.
12 S.B. 496, § 5; Sales and Use Tax Credit FAQs, Maryland Comptroller, Feb. 2021. The vendor’s return must be filed using the Comptroller’s bFile system.
13 The standard vendor credit is provided by MD. CODE ANN., TAX-GEN § 11-105.
14 MD. CODE ANN., TAX-GEN § 10-102.1.
15 MD. CODE ANN., TAX-GEN § 10-102.1(b)(2).
16 MD. CODE ANN., TAX-GEN § 10-102.1(c)(3).
17 MD. CODE ANN., TAX-GEN § 10-102.1(f)(1).
18 MD. CODE ANN., TAX-GEN § 10-102.1(f)(2).
19 MD. CODE ANN., TAX-GEN § 10-102.1(j).
20 MD. CODE ANN., TAX-GEN §§ 10-205(m); 10-306(b)(6). The credit is provided by MD. CODE ANN., TAX-GEN § 10-701.1.
21 Ch. 641 (S.B. 523), Laws 2020. For further information on the PTE tax, see GT SALT Alert: Multiple Maryland tax bills enacted; Administrative Release No. 6, Maryland Comptroller, revised Sept. 2020.
22 According to the Comptroller’s guidance, affected members must make the addition using the new Form 502LU. Tax Alert: Maryland RELIEF Act, Maryland Comptroller, Feb. 16, 2021.

Contacts: