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Multiple Maryland tax bills enacted

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Maryland Gov. Larry Hogan recently permitted a series of tax bills to take effect without his signature from the state’s historically abbreviated legislative session. These laws include the creation of an elective pass-through entity (PTE) regime,1 which will apply to the 2020 tax year; a change to the number of employees needed to utilize three-factor apportionment for worldwide headquarters companies;2 and a bill establishing a November 2020 referendum on whether Maryland should permit sports and event betting.3 Separate legislation extended the sunset period on the application of Maryland sales tax to car rentals and car sharing.4 Another measure provides for exemptions from sales and use tax for sales of certain data center personal property, while allowing local governments to reduce or eliminate personal property tax assessments.5 The governor also vetoed legislation that would have applied a gross receipts tax to digital advertising and increased taxes on tobacco products, and a bill that would have applied sales and use tax to digital downloads.

Maryland income tax changes Elective PTE regime The legislation creating an elective PTE regime for pass-through businesses will take effect on July 1, 2020, and is effective for tax years beginning after Dec. 31, 2019.6 Limited liability companies, limited liability partnerships, partnerships, limited partnerships, S corporations and business and statutory trusts are eligible to make the election.7 This elective tax produces a workaround to the $10,000 state and local tax deduction cap imposed in the Tax Cuts and Jobs Act of 2017 on individuals for federal income tax purposes beginning in the 2018 tax year, to which many states have enacted measures designed to blunt the impact.

Since 1991, Maryland has imposed a tax on PTEs based upon each PTE’s non-resident owners’ pro rata or distributive share of each PTE’s nonresident taxable income.8 The legislation expands this provision to allow PTEs to elect to pay tax with respect to either the nonresident or resident members of the PTE. Despite the added language allowing a PTE to pay tax with regard to its “resident” owners, the computation of tax under the new election requires taxpayers to compute tax with regard to all members of the PTE.

For PTEs that elect the new entity-level tax, the tax is computed in a substantially similar manner to how it has been historically computed by nonresident taxpayers. Distinct tax rates apply to the PTE depending on whether owners of the PTE are individuals or corporations.9 Tax is applied to the distributive or pro rata shares of the PTE’s taxable income, representing each individual owner at the sum of the highest state individual income tax rate10 and the lowest county income tax rate.11 Additionally, tax is applied to each corporate member’s pro rata or distributive share of the PTE’s taxable income at the state corporate tax rate.12

Maryland statutes have historically imposed the filing and payment requirements of the nonresident tax upon the PTE itself. The law elaborates, however, that the tax is treated as though it is imposed upon the PTE members, and is paid on their behalf by the PTE.13 The enacted legislation limits this assumption to apply only to taxpayers electing to pay tax with regard to the PTE’s nonresident partners. For taxpayers paying tax with respect to the PTE’s resident partners, the incidence of the tax statutorily defaults to the entity itself, and the tax is not assumed to be paid on the partner’s behalf.14

The legislation also modifies the credit mechanism of the nonresident entity tax to allow residents to claim a credit for taxes paid by the PTE. Each owner of a PTE that elects and pays the entity-level tax may claim a credit based on their proportionate share of the taxes paid by the entity.15 This credit is designed to ensure that resident members are taxed for Maryland purposes in the same manner as they would be if the tax were asserted directly upon the member. The legislation also modified the credit mechanism to allow for a credit against county income tax as well as state income taxes.16

Worldwide headquarters companies and 3-factor apportionment As Maryland has transitioned toward utilizing single sales factor apportionment, Maryland recently developed an election for worldwide headquarters companies meeting certain criteria to continue to use a three-factor (double-weighted sales) apportionment formula. In order to use this formula, the taxpayer must be a corporation included in a group of corporations including a parent corporation that filed a Form 10-Q with the SEC for the period ended June 30, 2017, and must have its principal executive office in the state. The parent also must maintain at least 500 full-time employees at that office from July 1, 2017, through June 30, 2020.17 The legislation allows a parent that meets the Form 10-Q filing requirement with a principal executive office in Maryland to make the apportionment election if such parent is a franchisor, and is part of a group of corporations maintaining at least 400 full-time employees at its Maryland principal executive office from July 1, 2017, through June 30, 2020.18

Maryland sales and use tax changes Qualified data center sales and use tax exemption As part of Maryland’s efforts to incentivize the development of data centers within the state, effective July 1, 2020, S.B. 397 provides an exemption from sales and use taxes for certain data center personal property. The law also permits local governments to reduce or even eliminate assessments on data center personal property. In order to qualify for the provision, a corporation or individual must apply for an exemption certificate attesting that it meets the requirements of a qualified data center.19

There are two standards to be considered a “qualified data center.” The first is to be located in a “Tier 1 Area”20 with at least $2,000,000 worth of personal property invested, and supporting at least five qualified positions within three years after applying for sales and use tax exemptions.21 The second standard applies to all data centers in Maryland located outside of Tier 1 areas and requires that they have at least $5,000,000 in personal property invested and support at least five qualified positions.22 “Qualified data center personal property” to which the exemption can be applied includes computer equipment, heating and cooling equipment, or equipment required for the generation of electricity.23 “Qualified positions” include a filled position that pays at least 150% of the state’s minimum wage and is newly created as a result of the data center relocating to or opening in Maryland.24

Peer-to-peer car sharing sales and use tax taxation S.B. 573 extends the termination date for the application of Maryland sales and use tax applied to car rental services and peer-to-peer car sharing.25 The application of sales and use tax to car rentals had originally been set to expire on June 30, 2020. However, under the statute it will now expire on June 30, 2021. This provision applies an 8% sales tax to peer-to-peer car sharing charges.26 The bill further requires the state conduct a study to evaluate the taxability of peer-to-peer car sharing.

Referendum on sports and event betting Pursuant to S.B. 4, Maryland will hold a referendum in November 2020 in order to determine if the state should legalize sports and event betting in accordance with the ruling in Murphy v. National Collegiate Athletic Association,27 which struck down a law that generally banned sports betting outside of certain grandfathered locations.28 If passed by voters, the revenue generated from sports and event betting will go towards funding Maryland’s education system.

Legislation vetoed by Gov. Hogan Gov. Hogan vetoed two notable tax-related bills from the current legislative session. It should be noted that the vetoes of these bills could be overridden by the Maryland legislature in a special legislative session likely to come later this year.

H.B. 732 included a gross receipts tax to digital advertising, similar to digital services taxes being considered by many European countries. This would have made Maryland the first state to apply a gross receipts tax to proceeds from digital advertising services. These services would be apportioned, with the numerator being the digital advertising service revenue from Maryland, and gross advertising service revenue from the United States in the denominator. The bill would have also increased taxes on tobacco products and applied new taxes to vaping products.29

H.B. 932 included a provision that would have expanded Maryland’s sales and use tax to digital downloads, including digital products and digital codes delivered to purchasers with a physical location in Maryland.30 The funds from the application of Maryland’s tax would have gone to fund the Blueprint for Maryland’s Future Fund, which is intended to finance improvements to Maryland’s early-childhood, primary, and secondary education systems.31

Administrative relief for the impacts of COVID-19 In addition to the significant tax legislation adopted and considered by the Maryland legislature, the Maryland Governor’s Office and Comptroller’s Office acted to provide administrative relief to taxpayers in dealing with the COVID-19 pandemic.32 On March 31, Gov. Hogan issued an executive order extending Maryland’s income tax filing deadlines to July 15.33 The Maryland Comptroller has also issued several agency proclamations permitting delayed income, franchise, and sales and use tax filings.

Maryland has delayed income and franchise tax filing and payments for individual, corporate, pass-through, and trust returns to July 15, 2020.34 The extension applies to all taxpayers and not just those who will owe under a certain amount, in contrast to the Federal extension. Relief is additionally available to taxpayers with fiscal years ending Jan. 1, 2020, through March 31, 2020. The Comptroller has also announced that interest and penalties will be waived for taxes paid by July 15. For payments made after July 15, interest and penalty will be assessed from July 15 until the date tax is paid. Further, estimated tax payments for the second quarter of 2020 have also been extended to July 15.35 While the original filing due date and due date for payment have been extended to July 15, the extended due dates of the Maryland income tax returns remain Oct. 15 for individuals and November 15 for corporations.

Similarly, the state has delayed sales and use tax return filings and payments for sales occurring during the months of February, March, April, and May to July 15, 2020. Sales and use tax returns and payments may be filed with the state by July 15 without incurring penalty.36

Maryland has also implemented several operational measures that impact taxpayers. The Comptroller’s office closed its physical offices and suspended the processing of paper returns effective April 15.37 While some processing has now resumed, expect continued delays as the Comptroller’s office tries to reduce the backlog of returns and correspondence sent during the spring. Collection efforts have ceased and will not resume until 30 days after the lifting of the state of emergency by the governor. The state has also issued guidance announcing the temporary acceptance of digital signatures.38

Finally, the Comptroller’s office has issued guidance related to the assertion of nexus resulting from COVID-19. The Comptroller’s office has announced that while it has not changed its policy with regard to activities that create nexus, it will consider whether activities in the state were conducted in an effort to comply with various public health guidelines and will also consider the temporary nature of employee activities in the state when making nexus and sourcing determinations.39

Commentary In passing the PTE tax legislation, Maryland joins several other states, including Connecticut, Louisiana, Oklahoma, Rhode Island, New Jersey and Wisconsin, which have developed mechanisms by which PTEs may pay an entity-level tax. The SALT deduction workaround included in S.B. 523 could potentially assist Maryland taxpayers by reducing their overall federal income tax liabilities. However, significant questions remain on how the IRS and other jurisdictions might respond to these types of regimes. The IRS has rejected state attempts to implement charitable deduction workarounds, whereby a taxpayer could “donate” the amount of taxes owed to a state charitable trust, thus producing a charitable contribution deduction, in lieu of a tax payment.40 To date, the IRS has not issued any similar guidance related to PTE tax workarounds. Taxpayers considering this election should be aware of the potential risks associated with IRS action in the future.

While Maryland’s PTE tax election is similar in concept to those passed in other states, there are a few material differences to consider. Maryland’s approach is somewhat necessarily unique as it expands upon the state’s current “nonresident entity tax.” This tax, while imposed at the entity level, was more akin to a nonresident withholding regime, and in fact has provisions that attribute the tax to the partners or members rather than the entity itself. While the new PTE tax does not adopt the provisions attributing tax liability to the partners for PTEs electing to be taxed at the entity level, the mechanics of the new tax are very similar to the taxation of nonresidents under the prior regime.

The computation of the tax raises questions as to whether the entity-level nature of the tax will be respected. The tax is computed based upon the distributive or pro rata shares of the entity’s taxable income, rather than the entity’s taxable income itself. Accordingly, PTEs that have special allocations to certain partners or members may incur a liability even if the entity itself is not in a taxable position. Further, the tax rates applied to the PTE tax vary depending on whether the partner is an individual or a corporation. The computation of the tax with respect to partner attributes rather than those of the entity could potentially be construed as a withholding tax, rather than a tax on the entity, despite a clear legislative intent to assert tax at the entity level.

There are also significant questions about how other states may treat the PTE tax. It is possible that other states may view the partner as a different taxpayer than the PTE, and not recognize the taxes paid at the entity level for purposes of computing the state’s credit for tax paid to another state. This could result in unexpected tax consequences for taxpayers electing to be taxed at the entity level in Maryland.

Other uncertainties remain, including whether the PTE credit is refundable at the partner level, or is available to be carried forward. Should a partner have more PTE credit than tax due, a risk exists that the partner may incur the tax at the entity level, and not be able to recover it through a credit at the partner level. The issue of whether the partnership itself receives a deduction for the tax paid at the entity level also appears to be unresolved. While Maryland appears to allow taxpayers to claim the gross credit, other states like Connecticut have reduced the credit amount to account for the portion of the tax that is deductible.

As the election is available for the 2020 tax year, resident taxpayers should also begin to consider whether an election is beneficial, and whether 2020 estimated tax payments should be made at the individual or the entity level.

Maryland’s decision to narrowly expand the eligibility criteria for the alternative weighted three-factor apportionment, and the creation of a sales and use tax exemption for qualified data center personal property, both reflect the state’s desire to attract and retain industry-specific business and create jobs and investment in the state. In particular, the data center exemption provision is designed to encourage large data center to locate within Maryland. Maryland’s requirements for “qualified data centers” are similar but less restrictive than those in Virginia. In Virginia, computer equipment and software are exempt from sales and uses taxes if they meet one of two standards. Data centers located in Virginia are generally eligible for the exemption if they involve $150 million in new investment, and create at least 50 new jobs, provided that each of those 50 jobs pays at least 150% of the prevailing average wage in the locality. Similar to Maryland, there is also another standard for those data centers located in areas with at least 150% of the statewide unemployment rate. In those localities, the data center still requires $150 million in new investments, but only 25 new jobs that pay 150% of the prevailing average wage in the locality need to be created. Maryland will require lower investment and employment thresholds to receive these benefits than Virginia.41 These lower standards may be reflective of the strength of Virginia’s existing technology sector and Maryland’s desire to increase high-tech employment. The relative ease of using Maryland’s exemption may help the state to increase the number of data centers in the state.

The recent Maryland legislative session is also notable for the bills that passed the legislature and were vetoed by the governor. Many observers have closely followed H.B. 732, which would have instituted the nation’s first digital services tax on digital advertisers and would have primarily targeted large technology companies. In vetoing these bills, Gov. Hogan called these taxes “misguided” and the tax increase “unconscionable in the current environment.”42 Even prior to the COVID-19 pandemic, however, many commentators have noted that the digital service taxes, such as the one proposed by Maryland, are a poor policy choice, against the international trend, and are littered with potential legal challenges, including but not limited to a violation of the permanent Internet Tax Freedom Act and a violation of the First Amendment. Although vetoed by the governor, this legislation warrants further attention, as it was passed by the requisite three-fifths majority in the Maryland legislature that is required to override the governor’s veto. Should the legislature override the governor’s veto and enact a digital services tax, legal challenges will almost certainly follow.



1 Ch. 641 (S.B. 523), Laws 2020.
2 Id.
3 Ch. 492 (S.B. 4), Laws 2020, effective July 1, 2020.
4 Ch. 567 (S.B. 573), Ch. 567 (H.B. 841) Laws 2020, effective July 1, 2020.
5 Ch. 640 (S.B. 397), Ch. 640 (H.B. 1339) Laws 2020, effective July 1, 2020.
6 Ch. 641 (S.B. 523), Laws 2020, § 2.
7 MD. CODE ANN., TAX-GEN. § 10-102.1(b)(2).
8 See MD. CODE ANN., TAX-GEN. § 10-102.1; Administrative Release No. 6, Md. Office of the Comptroller, rev. Sept. 1, 2014, at § I.
9 MD. CODE ANN., TAX-GEN. § 10-102.1(d)(2).
10 MD. CODE ANN., TAX-GEN. § 10-105(a).
11 MD. CODE ANN., TAX-GEN. § 10-106.1.
12 MD. CODE ANN., TAX-GEN. § 10-105(b).
13 MD. CODE ANN., TAX-GEN. § 10-102.1(c).
14 Id.
15 MD. CODE ANN., TAX-GEN. §§ 10-102.1(e); 10-701.1; 10-703.
16 Id.
17 MD. CODE ANN., TAX-GEN. § 10-402(a), (d)(3).
18 MD. CODE ANN., TAX-GEN. § 10-402(a)(3)(II), (d)(3).
19 MD. CODE ANN., TAX-GEN. § 11-236; MD. CODE ANN., TAX-PROP. § 7-246.
20 A Tier 1 area refers to a county that has“(i) an average rate of unemployment for the most recent 24-month period for which data are available that exceeds 150% of the average rate of unemployment for the State during that period; (ii) an average rate of unemployment for the most recent 24-month period for which data are available that exceeds the average rate of unemployment for the State by at least 2 percentage points; or (iii) a median household income for the most recent 24-month period for which data are available that is equal to or less than 75% of the median household income for the State during that period,” as well as counties that no longer meet this definition but met at least one of the criteria within the preceding 12 months. MD. CODE ANN., ECON. DEV. § 1-101. Federal Opportunity Zones also qualify as a Tier 1 area. MD. CODE ANN., TAX-GEN. § 11-236(a)(8).
21 MD. CODE ANN., TAX-GEN. § 11-236(a)(5)(I).1.
22 MD. CODE ANN., TAX-GEN. § 11-236(a)(5)(I).2.
23 MD. CODE ANN., TAX-GEN. § 11-236(a)(6).
24 MD. CODE ANN., TAX-GEN. § 11-236(a)(7).
25 Ch. 640 (S.B. 397), Laws 2020.
26 MD. CODE ANN., TAX-GEN. § 11-104(c-1).
27 138 S. Ct. 1461 (2018).
28 Ch. 492 (S.B. 4), Laws 2020, § 2.
29 H.B. 732, vetoed by Governor, May 7, 2020.
30 H.B. 932, vetoed by Governor, May 7, 2020.
31 Ch. 492 (S.B. 4), Laws 2020.
32 Maryland Tax Alert 04-14-20A, Impact of COVID-19 on Maryland Tax Filing, Md. Office of the Comptroller, April 14, 2020 (superseding Maryland Tax Alert 4-1, Apr. 1, 2020). This contrasted Virginia’s approach, which used the legislative process to codify and enhance earlier administrative actions.
33 Order of the Governor of the State of Maryland, No. 20-03-31-01, March 31, 2020.
34 In addition, the statute of limitations for filing a claim for refund for the 2016 tax year was also extended to July 15, 2020.
35 Maryland Tax Alert 04-14-20A, Impact of COVID-19 on Maryland Tax Filing, Md. Office of the Comptroller, April 14, 2020.
36 Id.
37 News Release, Md. Office of the Comptroller, April 6, 2020.
38 Maryland Tax Alert 04-20, Temporary Acceptance of Digital Signatures, Md. Office of the Comptroller, Apr. 1, 2020.
39 Maryland Tax Alert 05-04-20, Employer Withholding Requirements for Teleworking Employees during the COVID-19 Emergency, Md. Office of the Comptroller, May 4, 2020.
40 See T.D. 9864, effective on Aug. 12, 2019, and applicable on and after Aug. 27, 2018.
41 VA. CODE ANN. § 58.1-609.3(18).
42 Letter Vetoing H.B. 732 and H.B. 932, Office of Maryland Governor Larry Hogan, May 7, 2020.



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