The Maryland General Assembly recently enacted the Maryland Tax Reform Act of 2007, which significantly raised the State’s major taxes. You should be aware that there are numerous planning opportunities for avoiding or minimizing the effects of this new legislation and we would very much like to work with you in addressing these issues. This legislation will: (1) expand the tax base for the Maryland state and local real estate recordation and transfer taxes,
(2) (a) increase the corporate income tax rate, and (b) impose additional income tax reporting requirements on corporations doing business in Maryland,
(3) increase individual income tax rates, and (4) (a) increase the Maryland sales and use tax rate, and (b) expand its application to certain computer services.
This Legal Bulletin summarizes these four key parts of this legislation.
Real Estate Recordation and Transfer Taxes – Sale of Controlling Interests
A very significant part of the Tax Reform Act for many of our clients was the expansion of the recordation and transfer taxes so that transfers of a “controlling interest” in a “real property entity” are now explicitly subject to tax beginning on July 1, 2008. The Maryland state government imposes a 0.5% transfer tax on the gross sales price of real property within the State. Every local jurisdiction imposes corresponding transfer and recordation taxes so that three different taxes are all imposed on a sale of real estate located within Maryland. For example, Baltimore City imposes a 1.5% transfer tax and a 1% recordation tax for an aggregate state and city tax rate of 3% of the gross sales price of real property located within the city. Prior to the effective date of this legislation, sales of entities that own real estate within Maryland were almost always exempt from these taxes.
Corporate Income Tax – Increase in Rate and New Reporting Requirements
(a) The Maryland state corporate income tax rate is increased from 7% to 8.25% effective as of January 1, 2008.
(b) Generally, for Maryland corporate income tax purposes, affiliated corporations must each file a separate state corporate income tax return and their respective incomes are not aggregated in determining their tax liabilities. The legislature considered adopting a unitary tax system that would require an affiliated group of corporations to aggregate their Maryland state taxable incomes and file a single return but this proposal to require combined corporate reporting was defeated. Instead, the legislature created a commission that will review Maryland’s current business tax structure and make specific recommendations for changes to the state’s business tax structure in future years. To gather information for this commission, Maryland imposed new and onerous reporting requirements on corporations “doing business” in Maryland that will enable the commission to compare how much Maryland state corporate income tax is paid under the current system with how much would be paid if the state adopted a unitary corporate income tax system. In effect, corporations will be reporting their incomes under both systems and paying tax using the current system during the term of the commission.
Individual Income Tax – Increase in Marginal Income Tax Brackets
For the first time in more than 40 years, Maryland is increasing its marginal individual state income tax rates. Prior to the Tax Reform Act of 2007, individuals who earned more than $3,000 per year paid a flat Maryland state income tax rate of 4.75% and a corresponding additional local income tax that is generally imposed at rates of between 2% and 3%. Under the new legislation, the following three additional individual income tax brackets were created:
(b) Maryland’s sales and use tax base was expanded to include “computer services.” Under the Tax Reform Act, “computer services” include custom computer programming; computer facilities management and operation; computer system planning and design that integrate computer hardware, software, and communications technologies; computer disaster recovery; data processing, storage, and recovery; and hardware or software installation, maintenance, and repair. “Computer services” does not include Internet access; typing or data entry on word processing equipment; computer training; the installation, maintenance, or repair of tangible personal property other than computer hardware or software that includes computer hardware or software as a component part; or a “computer service” that is provided in connection with (i) electronic fund transfers, financial transactions, automated teller machine transactions, or other banking or trust services; (ii) business management, account management, personnel, payroll, employee benefit, or other administrative services; (iii) educational, legal, accounting, architectural, actuarial, medical, medical diagnostic, or other professional services; or (iv) telecommunications services.
Steven M Gevarter, 410-576-4260
Y. Jeffrey Spatz, 410-576-4124
This Bulletin is designed to inform you of current legal developments and should not be construed as legal advice or opinion concerning specific factual situations.
1 The Tax Reform Act increases the individual income tax exemptions for lower- and middle-income individuals, while phasing out the exemptions for individuals with higher income levels. The new exemption amounts are as follows: ·$3,200: Single filers who earn up to $100,000 and joint filers who earn up to $150,000 will receive a $3,200 exemption.
·$2,400: Single filers who earn more than $100,000 and joint filers who earn more than $150,000 will receive a $2,400 exemption.
·$1,800: Single filers who earn more than $125,000 and joint filers who earn more than $175,000 will receive an $1,800 exemption.
·$1,200: Single filers who earn more than $150,000 and joint filers who earn more than $200,000 will receive a $1,200 exemption.
·$600: Single filers who earn more than $200,000 and joint filers who earn more than $250,000 will receive a $600 exemption.
2 Generally, a vendor is entitled to keep 0.9% of the sales and use tax it collects as reimbursement for the expenses associated with collecting and remitting this tax. Effective January 3, 2008, Maryland reduces the vendor credit against sales and use tax by capping it at $500 per month.