Brief Summary of 2008 Tax Legislation for Businesses

The following is a brief summary of Maryland tax legislation affecting businesses that was passed during the 2008 session of the General Assembly and signed into law by Governor Martin O'Malley. All references are to the Tax-General Article (TG), Annotated Code of Maryland, unless otherwise noted. For more detailed information, see Summary of 2008 Tax Legislation

INCOME TAX

Income Tax Credit for Cellulosic Ethanol Technology Research and Development - House Bill 140 (Chapter 139, Acts of 2008) - This Act provides for a new Maryland income tax credit for cellulosic ethanol technology qualified research and development expenses incurred in Maryland by an individual or corporation. Cellulosic ethanol technology produces ethanol from agricultural plant waste such as stalks and husks, and industrial plant waste such as sawdust and paper pulp, instead of producing ethanol from grains such as corn. The total of all such credits cannot exceed $250,000 per year. Effective July 1, 2008, for tax years beginning after December 31, 2007.

Sunset Extension for Tax Credits for Qualifying Employees with Disabilities - House Bill 280 (Chapter 658, Acts of 2008) - This Act extends by one year the termination provision and dates of applicability of the tax credit that an employer may claim for wages, child care and transportation expenses for qualified employees with disabilities. The new termination date for this Qualifying Employees with Disability Tax Credit is June 30, 2009. Effective July 1, 2008.

Tax Benefits for Arts and Entertainment Districts for Jewelry and Clothing Designers - House Bill 680 (Chapter 290, Acts of 2008) - This Act expands the existing subtraction from Maryland taxable income for income derived from a sale in an arts and entertainment district. The subtraction modification is expanded to include income derived from the sale in an arts and entertainment district of original jewelry, clothing, or clothing design created by a qualifying artist. However, the subtraction does not include income from tailoring, clothing alteration, or jewelry repair. Effective July 1, 2008.

Termination Provisions for Job Creation Tax Credit - House Bill 721 (Chapter 517, Acts of 2008) - This Act extends the termination date and the dates of applicability of the tax credits for the Job Creation Tax Credit. The termination date is extended from January 1, 2010 to January 1, 2014. The dates of applicability are extended to all tax years beginning before January 1, 2014 and may only be claimed for qualified positions at a newly established or expanded business facility that commences operations before January 1, 2013. Effective October 1, 2008.

Biotechnology Investment Incentive Tax Credit - House Bill 723 (Chapter 518, Acts of 2008) - This Act changes the eligibility standards and the amounts that can be claimed for the Biotechnology Investment Incentive Tax Credit. Eligibility is no longer restricted only to an individual, a corporation, or a qualified Maryland venture capital firm. Eligibility is expanded by amending the definition of "qualified investor" to include an individual or any other entity that invests at least $25,000 in a qualified Maryland biotechnology company, and is required to file an income tax return in any jurisdiction. The definition of "qualified investor" is also amended to provide that the term "qualified investor" does not include a qualified pension plan, individual retirement account, or other qualified retirement plan under the Employee Retirement Income Security Act of 1974, as amended, or fiduciaries or custodians under such plans, or similar tax-favored plans or entities under the laws of other countries. This Act changes the maximum tax credit allowed in an initial tax credit certificate to $250,000 for any qualified investor. It also provides that during any fiscal year, the Secretary of the Department of Business and Economic Development (DBED) cannot certify eligibility for tax credits for investments in a single qualified Maryland biotechnology company that in the aggregate exceed 15 percent of the total appropriations to the Maryland Biotechnology Investment Tax Credit Reserve Fund for that fiscal year. Effective July 1, 2008 for tax years beginning after December 31, 2008.

Tax Credit for Employer Established Work-Based Learning Programs for Students - Senate Bill 297 (Chapter 571, Acts of 2008) - This Act reestablishes an income tax credit program for approved work-based learning programs for students. For tax years beginning after December 31, 2008, an employer may claim an income tax credit based on the wages paid to secondary or postsecondary students between 16 and 23 years of age who are participating in a work-based learning program approved by the Maryland Department of Education. This income tax credit will be available to both individuals and corporations and may be claimed against only the state income tax and not the local tax. An insurance company may claim a credit against the premium tax. Effective July 1, 2008 for tax years beginning after December 31, 2008.

Sunset Extension for State Employment Opportunity Tax Credit - Senate Bill 314 (Chapter 391, Acts of 2008) -This Act extends by one year the termination provisions and dates of applicability of the State Employment Opportunity Tax Credit allowed to employers for certain wages and child care or transportation expenses of qualified employment opportunity employees. The termination provisions are extended to June 30, 2009. The dates of applicability are extended to all tax years beginning after December 31, 1994 but before January 1, 2012. Effective July 1, 2008.

Lawyer Payments for Taxes and Unemployment Insurance Contributions - Senate Bill 493 (Chapter 410, Acts of 2008) - This Act repeals the requirement that the Maryland Client Protection Fund verify with the Comptroller that each lawyer who pays the annual fee has paid all undisputed taxes and unemployment insurance contributions or has made a payment arrangement. The Act requires the Maryland Client Protection Fund to issue a list to the Comptroller of lawyers that have paid the annual fee. The Act allows the Comptroller to refer lawyers who have not paid all undisputed taxes and unemployment insurance contributions or have not made a payment arrangement for the delinquent amounts to Bar Counsel. The Maryland Client Protection Fund must provide the Comptroller with this list by August 31 of each year. Effective June 1, 2008.

Income Tax Credit for Bio-Heating Oil - Senate Bill 565 (Chapter 140, Acts of 2008) This Act establishes a credit against the state income tax for an individual or corporation in the amount of three cents for each gallon of bio-heating oil purchased for space or water heating. For purposes of this credit, bio-heating oil means heating oil with a blend of at least 5 percent biodiesel oil. The credit cannot exceed the lesser of $500 or the state income tax for the tax year. An individual may not carry forward any excess credit. The taxpayer must apply to the Maryland Energy Administration (MEA) for an initial credit certificate. The initial credit certificate shall be issued for number of gallons purchased by the taxpayer and must contain the maximum amount of credit that the taxpayer may claim. By January 1, 2009 and each year after, MEA is required to provide the Comptroller with a list of each taxpayer that has been issued an initial credit certificate and the maximum amount of credit allowed for each taxpayer. Effective July 1, 2008 for tax years beginning after December 31, 2007, but before January 1, 2013.

Maryland Individual Tax Preparer Act - Senate Bill 817 (Chapter 623, Acts of 2008) - This Act creates an eight-member State Board of Individual Tax Preparers in the Department of Labor, Licensing, and Regulation to administer a new registration program that requires qualified individuals to register to provide individual tax preparation services. The Governor shall appoint the Board members with the advice of the Department's Secretary, the Comptroller, and the Attorney General. The Board shall adopt rules of professional conduct as appropriate to ensure a high standard for the practice of individual tax preparation; select and administer examinations; establish fees; maintain a list of all authorized individual tax preparers; maintain a record of its proceedings; and maintain records of all complaints regarding individual tax preparers in Maryland. The Board may also adopt any bylaw and regulation necessary to carry out this Act. An individual who provides tax preparation services has until June 1, 2010 to meet registration requirements. Persons licensed by the State Board of Public Accountancy or a licensing authority in another state, persons admitted to practice law in Maryland or another state, persons employed by government in performance of official duties, persons enrolled to practice before the IRS under Circular 230, and persons serving as an assistant to an individual tax preparer or exempted professional are exempted from registration requirements. Effective June 1, 2008.

New 6.25 Percent Tax Rate - Budget Financing Act - Senate Bill 46 (Chapter 10, Acts of 2008 - This Act repeals the sales and use tax on computer services (see Sales and Use Tax section below), and adds a new 6.25 percent personal income tax bracket for Maryland taxable income in excess of $1,000,000. This Act provides that for a tax year beginning after December 31, 2007, but before January 1, 2011, the state income tax for an individual, including spouses filing a joint return or a surviving spouse or a head of household, includes a new bracket of 6.25 percent of Maryland taxable income in excess of $1,000,000. Because the new 6.25 percent rate applies retroactively to income for the tax year beginning January 1, 2008, this Act also provides that the Comptroller shall waive any interest or penalty imposed on an individual for underpayment of estimated income tax for calendar year 2008, to the extent that the Comptroller determines that the interest or penalty was incurred because of the new 6.25 percent rate. This Act provides that the rate for withholding by a pass-through entity for each nonresident individual's distributive share or pro-rata share of the pass-through entity's nonresident taxable income is the sum of the 1.25 percent special nonresident tax and the new 6.25 percent individual rate, for a total of 7.5 percent. Effective July 1, 2008 for tax years beginning after December 31, 2007.

CORPORATE REPORTING

Reporting and Study of the Corporate Income Tax - House Bill 664 (Chapter 178, Acts of 2008) and Senate Bill 444 (Chapter 177, Acts of 2008) This Act amends four sections of Maryland tax law that were enacted during the 2007 Special Session. This Act expands the Maryland Business Tax Reform Commission from 17 to 19 members. One of the new members must be a representative of the Greater Baltimore Committee. The other new member must be "a representative of an organization that represents Maryland manufacturers, appointed by the Governor". This Act provides for a cut-off date of January 1, 2011, after which manufacturing corporations no longer have to submit reports on the difference in tax owed under the single sales factor apportionment method. This Act removes the requirement that a copy of the federal income tax return must be filed with the Comptroller each year by every individual who reports income or loss on Schedule C or Schedule E of Form 1040. The Comptroller still has the power to make a specific request to an individual for a copy of the federal return. This Act significantly reduces the scope of the corporate combined reporting requirements by changing who must report and what information must be reported.

The biggest change in who must report is that the law passed by the Special Session required corporations which do not have nexus with Maryland to comply with the combined reporting requirements, whereas this Act changes the law to provide that only corporations which have nexus with Maryland are to required comply with the combined reporting requirements. The change in the nexus requirement is accomplished by providing that the combined reporting requirements only apply to corporations that are required to file a Maryland income tax return. Also, this Act limits who must report by changing the definition of "Corporate group" to specify that a corporate group does not include: any corporation that, for any reason, is not subject to U.S. federal income tax; an insurer as defined in Section 1-101 of the Insurance Article; or a regulated investment company, as defined in Section 851(a) of the Internal Revenue Code.

This Act significantly reduces the information that a corporate group must be report by eliminating all of the information required in the law passed by the Special Session, and replacing all that with the following requirements:

• A pro forma "water's edge" combined corporate income tax return filed in accordance with regulations adopted by the Comptroller.
• In a format specified by the Comptroller, specific information on the state income tax differences if Maryland had a throwback rule, and also if Maryland required allocation to Maryland of 100 percent of income that is nonoperational and therefore not apportionable.

This Act removes the criminal penalties for failure to comply and requires the Comptroller to develop and implement a penalty system.

Effective July 1, 2008 for tax years beginning after December 31, 2005 but before January 1, 2011. The reports required for a tax year beginning before January 1, 2007 shall be submitted as part of a corporation's tax return for the corporation's next tax year beginning after December 31, 2006.

SALES AND USE TAX

Solar and Geothermal Tax Incentive and Grant Program - House Bill 377 (Chapter 132, Acts of 2008) - This Act increases specified grant limits under the Solar Energy and Geothermal Heat Pump grant programs, exempts the sale of specified solar energy and geothermal equipment from the state sales and use tax, and exempts specified solar energy property from the state and local real property taxes. "Geothermal equipment" means equipment that uses ground loop technology to heat and cool a structure. "Solar energy equipment" means equipment that uses solar energy to heat or cool a structure, generate electricity to be used in a structure, or provide hot water for use in a structure. Solar energy equipment does not include equipment that is part of a nonsolar energy system or that uses any type of recreational facility or equipment as a storage medium, such as a swimming pool or hot tub. Effective July 1, 2008.

Energy Star Product Tax Exemption for Boilers - House Bill 985 (Chapter 180, Acts of 2008) and Senate Bill 456 (Chapter 179, Acts of 2008) - This bill expands the definition of "Energy Star product" to include boilers, for the purpose of excluding sales of boilers from the sales and use tax during the tax-free weekend in February of each year, beginning in calendar year 2011. Effective July 1, 2008.

Repeal of Sales and Use Tax on Computer Services - Budget Financing Act - Senate Bill 46 (Chapter 10, Acts of 2008) - This Act repeals the sales and use tax on computer services that was enacted during the 2007 Special Session. It also restores the previous sales and use tax exemptions for sales of custom computer software services and optional computer software maintenance contracts. Effective July 1, 2008 for tax years beginning after December 31, 2007.

BOXING AND WRESTLING TAX

Mixed Martial Arts Regulation by State Athletic Commission - House Bill 795 (Acts of 2008) and Senate Bill 649 (Acts of 2008) These Acts require an individual to be licensed by the State Athletic Commission in order to participate in a contest as a mixed martial arts contestant. The Commission shall adopt regulations to ensure the safety of individuals who participate in amateur or professional mixed martial arts contests. These Acts provide for the inclusion of a "mixed martial arts contest" in the definition of "boxing or wrestling contest." The boxing and wrestling tax is now extended to gross receipts derived from a charge for admission to mixed martial arts contests in Maryland, and from charges to view the telecast of mixed martial arts contests in Maryland regardless of the origin of the telecast. Effective October 1, 2008.