United States: Maryland Tax Legislation Enacted, Including New Private Letter Ruling Program

Maryland's 2016 legislative session resulted in a number of tax bills signed into law by Governor Larry Hogan on May 10 and May 19, 2016, as well as other tax bills adopted into law on May 28, 2016 without the Governor's signature. Material components of these bills include the adoption of a process to implement private letter rulings, in addition to adjustments of important components of Maryland income and withholding taxes.

Adoption of Private Letter Ruling Process

Effective October 1, 2016, Maryland taxpayers will have the ability to pursue private letter rulings (PLRs) for additional tax guidance.1 While this particular bill generally focused on altering the evaluation process for certain tax credits (which potentially may have implications for available tax credits for Marylanders down the road), practitioners are lauding the brief second section calling for the creation of PLR procedures as a necessary step to increase transparency.

Maryland will join 33 states that currently provide PLRs or similar guidance to taxpayers. Historically, the Maryland Comptroller has not issued tax guidance to taxpayers through PLRs. In the past, taxpayers had the ability to pursue formal declaratory rulings and informal, nonbinding guidance. While the Comptroller has published Frequently Asked Questions (FAQs) and tax tips have been published on its Web site, these publications are designed to be general in nature and do not specifically address detailed fact patterns and issues relevant to particular taxpayers.

Income Tax Legislation

New Corporate Filing Date

In response to changes in the due date for federal corporation income tax returns, Maryland will shift the deadline of corporate tax returns from March 15 to April 15 for calendar year filers, and from the 15th day of the third month after year end to the 15th day of the fourth month after year end for all fiscal year filers.2 The adopted legislation becomes effective on July 1, 2016 and is applicable to corporate income tax returns for the 2016 tax year and beyond. The Maryland legislation does not make any amendments to existing filing requirements for partnership returns, which remains April 15 for calendar year filers, and the 15th day of the fourth month after year end for all fiscal year filers.

Lower Penalty for Income Tax Non-Payment

Effective July 1, 2016, the maximum penalty imposed on a taxpayer who fails to pay income taxes in Maryland decreases from 25 percent to 10 percent.3 This applies to all income tax penalties assessed on or after July 1, 2016. This bill does not alter the 25 percent penalty associated with the non-payment of the alcoholic beverage tax, financial franchise tax and tobacco tax.

Retirement Income Data Collection

Governor Hogan also signed a bill that instructs the Comptroller to amend Maryland's personal income tax form by January 1, 2017.4 The updated form will require the collection of certain taxpayer retirement income information, including income from the following sources:

  • A retirement plan that is part of an employee retirement system;
  • An individual retirement account (IRA);
  • A simplified employee pension (SEP);
  • Roth IRAs;
  • Certain ineligible deferred compensation plans;
  • Total amount of social security benefits received; and
  • Total amount of state pension exclusion claimed.

The General Assembly is requiring the Comptroller to provide a report by January 1, 2018 regarding the data collected from the updated forms.5

Education Tax Credit / Subtraction

The Maryland legislature adopted the Student Loan Debt Relief Credit, which for taxable years beginning after December 31, 2016, will allow a refundable income tax credit of up to $5,000 for students who have incurred a minimum of $20,000 in undergraduate student loan debt.6 In addition, the legislation creates for taxable years beginning after December 31, 2016, a matching state contribution for eligible college savings accounts in which the beneficiary is a Maryland resident and the account holder does not exceed certain income thresholds.7 Both of these provisions became law without the Governor's signature. The Governor had been in support of a different education bill that allowed businesses to claim tax credits for 60 percent of donations (up to a maximum of $200,000 in credits per year) to assist students in certain private or public schools.8

Aerospace, Electronics or Defense Contract Tax Credit

Finally, as a means to provide a significant income tax incentive for one high-profile corporate taxpayer to maintain its presence in Maryland, the Governor signed a bill allowing for an aerospace, electronics or defense contract tax credit.9 The tax credit is only available to projects located in Maryland that create or retain at least 10,000 full-time positions, each with an annual salary of at least $85,000, and generate at least $25 million in qualifying expenditures. The taxpayer may obtain up to three project designations in a tax year. The tax credit is equal to $250 per qualified employee, and the maximum amount of the credit (if all three project designations are obtained) is $7.5 million for each tax year in which the tax credit is in effect. Recapture provisions and other safeguards to ensure the requisite number of jobs and investment by the taxpayer is made are included in the legislation. The tax credit is applicable for the 2016-2020 taxable years.

Withholding Due Date Acceleration

In an effort to address tax fraud, starting in 2017, the Comptroller will require employers and those required to withhold income tax to submit their withholding statements, W-2s, and similar documents on or before January 31st of each year.10 The current deadline is February 28th. The earlier filing time will allow the Comptroller's office more time to verify the information and income reported on a tax refund claim by comparing it to W-2 statements. This verification process is an effective tool for identifying fraudulent claims and supports a previously failed bill backed by Comptroller Peter Franchot, which addressed new measures for controlling identity theft and tax return fraud.11

Changes to Interest Rate on Tax Refunds and Deficiencies

Maryland's current 13 percent interest rate on tax refunds and deficiencies is among the highest in the nation. This will begin to change over the next several years, as legislation was enacted to gradually reduce the applicable interest rate for tax refunds and deficiencies from 13 percent for the 2016 calendar year to 9 percent for the 2023 calendar year and beyond.12

Vessel Excise Tax Cap

The Maryland legislature adopted a bill related to the vessel excise tax that increases the tax cap from $15,000 by $100 annually, starting in July 2016.13 The existing $15,000 cap provides a tax break for taxpayers who own a boat greater than $300,000 registered in Maryland at the current 5 percent tax rate. This bill represents a tax increase and was not signed by the Governor, as it stands in contrast to the Governor's anti-tax platform.

Commentary

The new tax provisions signed into law this session are designed to benefit Maryland taxpayers with additional time to file and reduced penalties for non-payment, as well as providing taxpayers with a new outlet for seeking additional tax information from the Comptroller.

It will be interesting to see the final procedures regarding the new PLR program. This new form of Maryland tax guidance will not only benefit inquiring taxpayers about certain factually specific issues, but will also allow the state to publish its thought process regarding taxability determinations, filing requirements and assessments.

The decision of mechanics and formatting of PLRs will be occurring soon. The state is awaiting funding from the Governor's office and then will move forward with creating the mechanics of PLRs by October. It is believed that PLRs will most likely not differ much from previously issued declaratory rulings as they relate to disclosures. It is still a concern of whether or not PLRs will be made public in redacted versions.

Footnotes

1 Ch. 582 (S.B. 843), § 2, Laws 2016, effective June 1, 2016.

2 Ch. 547 (H.B. 484/S.B. 288), Laws 2016, effective July 1, 2016.

3 Ch. 642 (H.B. 1054), Laws 2016, effective July 1, 2016.

4 Ch. 648 (H.B. 1148), § 1, Laws 2016, effective July 1, 2016.

5 H.B. 1148, § 2.

6 H.B. 1014/S.B. 676, Laws 2016, adopted May 28, 2016.

7 Id.

8 S.B. 706.

9 Ch. 320 (S.B. 1112), Laws 2016, effective July 1, 2016.

10 Ch. 538 (H.B. 1333/S.B. 185), Laws 2016, effective July 1, 2016.

11 H.B. 162.

12 Ch. 322 (H.B. 422), Laws 2016, effective July 1, 2016.

13 H.B. 14/S.B. 58, adopted May 28, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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