Maryland enacts single sales factor apportionment, Amazon incentives, income tax reform


Eric Cheek
Metro DC - Arlington
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Brandon Kravatz
Metro DC - Arlington
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Sonia Shaikh
Metro DC - Arlington
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Jamie C. Yesnowitz 
Washington, DC
T +1 202 521 1504 

Chuck Jones 
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Lori Stolly 
T +1 513 345 4540 
On April 24, 2018, Maryland Gov. Larry Hogan signed legislation adding Maryland to the expanding list of states that have adopted single sales factor apportionment for corporate net income tax purposes.1 In addition, on April 25, 2018, Gov. Hogan signed legislation intended to present Amazon with a lucrative incentive package to construct its second headquarters within the state.2 Finally, on May 15, 2018, Gov. Hogan signed several bills intending to minimize the potential burdens created by federal tax reform provisions contained in H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA),3 by increasing the maximum standard deduction,4 maintaining the allowance of a state income tax personal exemption,5 and expanding the state’s earned income tax credit.6 

Single sales factor phased in with 2018 tax year Most taxpayers in Maryland currently use a three-factor apportionment formula with a double-weighted sales factor.7 Beginning with the 2018 tax year, however, single sales factor apportionment will be phased in for most taxpayers over a four-year period. The adopted legislation steadily expands the weight of the sales factor as a percentage of the overall apportionment computation by increasing the weight given to the sales factor in relation to the payroll and property factors, as follows:
  • For taxable years beginning in 2018, the sales factor is multiplied by three, plus the payroll and property factor, with a denominator of five;
  • For taxable years beginning in 2019, the sales factor is multiplied by four, plus the payroll and property factor, with a denominator of six;
  • For taxable years beginning in 2020, the sales factor is multiplied by five, plus the payroll and property factor, with a denominator of seven;
  • For taxable years beginning in 2021, the sales factor is multiplied by six, plus the payroll and property factor, with a denominator of eight; and
  • For taxable years beginning in 2022 and thereafter, a single sales factor will be used.8
Despite the general adoption of single sales factor apportionment, under the legislation, a corporation that qualifies as a “worldwide headquartered company” may elect to use the state’s current three-factor formula with a double-weighted sales factor.9 In order to qualify, a parent corporation of a group of corporations must: (i) file a Securities and Exchange Commission Form 10-Q for the quarterly period ending June 30, 2017; (ii) have its “principal executive office” located in Maryland; and (iii) employ at least 500 full-time employees at its Maryland principal executive office at all times from July 1, 2017, to June 30, 2020.10 To be eligible for this apportionment formula, the corporation must make an election to do so each year.11 Moreover, corporations that make the election must include gross income from intangible investments and capital gains from the sale of intangible property when calculating the sales factor numerator, based on the average of the property and payroll factors.12 Gross income from intangible investments includes dividends, interest and royalties.13

PRIME Act legislation Background

In September 2017, Amazon revealed its plans for investing substantial amounts of money in constructing its second headquarters project (HQ2), with an estimated creation of 50,000 high-paying jobs. Following a request for incentive proposals relating to HQ2, Amazon is considering a list of 20 localities, including Montgomery County, Maryland. According to an economic impact study commissioned by the Maryland Department of Commerce, HQ2 would bring approximately $17 billion per year to the state’s economy and $7.7 billion in annual wages when it becomes fully operational. 14 Additionally, the study found that the project would produce approximately $280 million in annual county taxes and $483 million in annual state taxes.15


The “Promoting ext-Raordinary Innovation in Maryland’s Economy Act” (the PRIME Act), provides state income, property and sales tax credits and exemptions to qualifying businesses. Although the legislation does not mention Amazon by name and provides the incentive package generally to “qualifying businesses,” it is clear that the large online retailer is the intended target.

The package offers an income tax credit equal to an amount determined by the Department of Commerce,16 a sales and use tax exemption for certain sales of construction material or warehousing equipment,17 and property tax credits in the amount of 50 percent of the state, county or municipal corporation property tax imposed by the state on the eligible assessment of qualified property. 18

The legislation limits its incentive package to only Fortune 100 companies that commit to hiring a minimum of 40,000 people with an average salary of at least $100,000 and spending at least $4.5 billion over a 17-year period.19 Additionally, it includes an expiration clause, stating that in order to claim the incentives, a business must be certified before Jan. 1, 2022.20 Further, the legislation provides authority for the Maryland Comptroller to recapture all benefits under the package if the Department revokes the certification of the business (which may occur if the business makes misrepresentations or spends significantly less on investment or employees than estimated). 21

Individual income tax reform Background

Maryland is one of several states with rolling conformity to the Internal Revenue Code (IRC). However, automatic conformity to any federal change is suspended if the Comptroller determines adoption will affect the state revenues by $5 million or more. Otherwise, legislation is required in order to decouple from amendments to the IRC.22 The Comptroller’s office estimated that although 72% of Maryland taxpayers may pay less in federal taxes following adoption of the TCJA, 23% of taxpayers will see their state and local taxes rise, blunting the overall positive federal tax effect of the TCJA.23 Maryland responded to this potential issue with several bills designed to benefit taxpayers.


S.B. 318 increases Maryland’s maximum standard deduction from $2,000 to $2,250 for single taxpayers, and $4,000 to $4,500 for joint filers, surviving spouses and heads of household. 24The higher amounts are indexed for inflation,25 and are applicable in 2018 and thereafter.26

S.B. 184 preserves a personal exemption for a Maryland individual income taxpayer, the taxpayer’s spouse under certain conditions, and eligible dependents, even though the personal exemption is no longer part of the federal tax law.27 In the bill’s Fiscal and Policy Note, the Maryland General Assembly found that if it were to repeal this exemption, 92 percent of all tax returns would see a rise in gross tax liability.28 In addition, the legislation directs the Maryland Board of Revenue Estimates to continue to review the impact of the TCJA and its impact on the state, and submit an updated report to the governor and General Assembly by the end of 2018. Likewise, this legislation is applicable in 2018 and thereafter. 29

S.B. 647 and H.B. 856 open the door to earned income tax credits for more individuals than before. Maryland offers a non-refundable credit, equal to the lesser of 50% of the federal credit under IRC Sec. 32 or the state income tax liability in the year. 30 For tax years beginning in 2018 and thereafter, if the non-refundable credit reduces the taxpayer’s liability to zero, the taxpayer becomes eligible to claim a refundable credit equal to 28% of the federal credit, lessened by any pre-credit state tax liability. 31 The credit is offered to low-income workers within a particular earning bracket and with a particular number of qualifying children. 32For the lowest tier of credits, no qualifying children are required. 33 Previous law limited the individuals who could claim the credit to taxpayers aged 25 to 64. S.B. 647 and H.B. 856 eliminate the age requirement, allowing anyone of adult age to claim it. 34


Since 2016, the Maryland legislature had been considering the adoption of single sales factor apportionment,35 with the state senate unable to find a majority to pass these bills. The legislation that was enacted in this session is based on a recommendation drafted by the Maryland Economic Development and Business Climate Commission. The recommendation included a comprehensive study detailing how the adoption of a single sales factor method would increase corporate growth in the state. The Commission determined that this would provide tax relief for corporations with significant property or payroll in the state.36 Nevertheless, it also noted that allowing a corporation to elect an apportionment method of its own choosing would “substantially increase the complexity of compliance and likely significantly decrease State revenues.”37 Having analyzed data from two specific tax years, the Commission concluded that the change in apportionment formula method would have a minimal impact on state revenues.

Prior to Maryland, over 20 states and the District of Columbia had already adopted a single sales factor apportionment method. Maryland’s shift in apportionment methodology leads to the usual issues encountered when a state adopts single sales factor apportionment. Corporations that have property and payroll in the state will likely see lower tax liabilities under the new method, while out-of-state corporations could be subject to higher tax liabilities since a single sales factor exports the tax base.

Maryland differs from most other states in its allowance of exceptions to the rule. The carve-out provided for a “worldwide headquartered company” that meets particular qualifications seemingly favors in-state corporations, which could be seen as discriminatory. The seminal U.S. Supreme Court case of Complete Auto Transit, Inc. v. Brady 38 established a four-prong test that must be satisfied before a state may impose a tax, with one of its prongs specifically disallowing a tax that is discriminatory to interstate commerce. Thus, the legislation may encounter constitutional challenges due to the worldwide headquartered company exception to single sales factor apportionment.

Taxpayers and practitioners should examine the effect of the apportionment change when calculating quarterly estimated taxes since the first affected tax year begins in 2018. Additionally, the legislation creates the need to take the changes into account for ASC 740 purposes, with potential effects being considered as a second quarter event.

Maryland’s incentive package designed to entice Amazon’s HQ2 is one of the largest among the 20 candidates vying for this project. If Amazon decides to build HQ2 in Maryland, the legislation will have a costly impact on the state’s coffers. In the bill’s Fiscal and Policy Note, the Maryland General Assembly estimated that it would decrease state revenue by approximately $5.6 billion and local government revenue by $924.3 million.39 Given the package’s exorbitant cost, it is only natural to wonder who is really footing the bill, the very subject of Cuno v. DaimlerChrysler, 40 and whether the provision of these tax breaks will create a disproportionate burden on the rest of Maryland’s residents. 

1 Ch. 341 (S.B. 1090) and Ch. 342 (H.B. 1794), Laws 2018, effective July 1, 2018, applicable to taxable years beginning after Dec. 31, 2017.
2 Ch. 350 (S.B. 877 / H.B. 989), Laws 2018.
3 Pub. Law No. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
4 Ch. 577 (S.B. 318), Laws 2018.
5 Ch. 575 (S.B. 184), Laws 2018.
6 Ch. 611 (S.B. 647) and Ch. 612 (H.B. 856), Laws 2018.
7 Former MD. CODE ANN., TAX-GEN. § 10-402(c). It should be noted that certain manufacturing companies have been required to use the single sales factor formula for several years, and such law remains in effect. Former MD. CODE ANN., TAX-GEN. § 10-402(c)(2).
8 MD. CODE ANN., TAX-GEN. § 10-402(d)(2).
9 MD. CODE ANN., TAX-GEN. § 10-402(a), (d)(3).
10 MD. CODE ANN., TAX-GEN. § 10-402(a). The legislation does not define what constitutes a “principal executive office.”
11 MD. CODE ANN., TAX-GEN. § 10-402(d)(3)(I).
12 MD. CODE ANN., TAX-GEN. § 10-402(d)(3)(II).
13 Id.
14 Karen Glenn Hood, Projected Impact of Amazon HQ2 to Maryland Exceeds $17 Billion Annually, Maryland Economic Development Association, Feb. 28, 2018.
15 Id.
16 MD. CODE ANN., TAX-GEN. § 10-746. The credit amount is the product of the state employer withholding amount multiplied by the total amount of wages paid for each qualified position at an eligible project.
17 MD. CODE ANN., TAX-GEN. § 11-234.
18 MD. CODE ANN., TAX-PROP. § 9-111.
19 MD. CODE ANN., ECON. DEV. §§ 6-901(c); 6-903(d).
20 Ch. 350 (S.B. 877 / H.B. 989), § 6.
21 MD. CODE ANN., ECON. DEV. § 6-906(b).
22 MD. CODE ANN., TAX-GEN. § 10-108.
23 The 60-Day Report: Effects of Federal Tax Law Revisions on the State of Maryland, Maryland Bureau of Revenue Estimates, Jan. 2018.
24 MD. CODE ANN., TAX-GEN. § 10-217(c).
25 MD. CODE ANN., TAX-GEN. § 10-217(d).
26 S.B. 318, § 2.
27 MD. CODE ANN., TAX-GEN. § 10-211(a).
28 S.B. 184: Fiscal and Policy Note, Maryland Department of Legislative Services.
29 S.B. 184, § 3.
30 MD. CODE ANN., TAX-GEN. § 10-704(b)(1).
31 MD. CODE ANN., TAX-GEN. § 10-704(b)(2)(ii).5.
32 IRC § 32(b).
33 Id.
34 MD. CODE ANN., TAX-GEN. § 10-704(b)(3).
35 Report of the Maryland Economic Development and Business Climate Commission, Phase II: Taxes, Maryland Economic Development and Business Climate Commission, 37-38, Jan. 2016.
36 Id. at 38.
37 Id.
38 430 U.S. 274, 279 (1977). The four-prong Complete Auto Transit test requires that (i) there must be a substantial nexus between the taxpayer and the state; (ii) the tax must be fairly apportioned; (iii) the tax must not discriminate against interstate commerce; and (iv) the tax must be fairly related to the services provided by the state.
39 S.B. 877: Fiscal and Policy Note, Maryland Department of Legislative Services.
40 547 U.S. 332 (2006).

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