Summary of 2005 Tax Legislation

The following is a summary of Maryland tax legislation that was passed during the 2005 session of the General Assembly and signed into law by Gov. Robert L. Ehrlich, Jr. All references are to the Tax-General Article (TG), Annotated Code of Maryland, unless otherwise noted. We've also included helpful links to the specific House and Senate bills.

Senate Bill 69 (Chapter 109, Acts of 2005) - Comptroller - Tax Return Preparer - Filing Requirements and Penalties

The Act began as a departmental bill and requires an individual who is an income tax return preparer to sign the return or claim for refund after it is completed and before it is presented to the taxpayer or nontaxable entity for signature. If the preparer is unavailable for signature, another preparer shall review the entire preparation of the return or claim for refund and then sign the return or claim for refund. If more than one income tax return preparer is involved in the preparation of the return or claim for refund, the individual who has the primary responsibility for the overall substantive accuracy of the preparation of the return or claim for refund shall be considered to be the income tax return preparer for purposes of this requirement.

The Act also requires any return or claim for refund prepared by an income tax return preparer to bear the identifying number for securing proper identification of the preparer, the preparer's employer, or both, as prescribed under §6109 (a) (4) of the Internal Revenue Code.

Any person who is an income tax return preparer with respect to any return or claim for refund who is required to sign the return or claim for refund and who fails to comply with this requirement shall pay a penalty of $50 for that failure, unless it is shown to the failure is due to reasonable cause and not due to willful neglect. The maximum penalty may not exceed $25,000 with respect to documents filed during any calendar year.

Any person who is an income tax return preparer and who fails to furnish the identifying number, as required, shall pay a penalty of $50 for that failure, unless it is shown that the failure is due to reasonable cause and not due to willful neglect. The maximum penalty may not exceed $25,000 with respect to documents filed during any calendar year.

This Act will take effect July 1, 2005.

Senate Bill 69

Senate Bill 70 (Chapter 5, Acts of 2005) - Office of the Comptroller - Tax Withholding Returns - Accelerated Monthly Reporting

This Act, which started as a departmental bill, will require an employer that is subject to the accelerated withholding remittance provisions of §10-822 (b) on the Tax-General Article, Annotated Code of Maryland, to file returns at least monthly, instead of every three months, if the aggregate threshold amount for the accelerated withholding remittance is not met before the return due date.

TG §10-822 (a) (2) requires a person who "reasonably expects the total amount of income tax required to be withheld in a quarterly period to be $700 or more, … [to] complete and file with the Comptroller of Maryland a monthly income tax withholding return…" on or before the 15th day of the month following the month in which the tax was withheld. Chapter 203, Acts of 2003, added new subsection (b) that requires a person, who was required to withhold at least $15,000 during the preceding calendar year, to complete and file a withholding return with the Comptroller within three business days following each payroll that causes the total accumulated tax withheld to exceed $700.

A person subject to the three-day reporting requirement would be required to file a monthly withholding return under TG §10-822 (a) (2). However, new TG §10-822 (c) (2) contradicts subsection (a) (2) and provides that a person is required to file at least once every three months.

This Act reconciles these two subsections and requires that a person who is subject to the three-day reporting requirement will be required to file a return at least once every month.

This Act will take effect January 1, 2006.

Senate Bill 70

Senate Bill 95 (Chapter 7, Acts of 2005) - Income Tax - Employer Withholding - Exemptions

This Act amends TG §10-910 to permit the Comptroller to require an employer to base income tax withholding for an employee who has not filed a required Maryland income tax return on one exemption.

The provisions of this Act allow the Comptroller to notify an employer that one or more of its employees have not filed the required Maryland income tax return. Once notified, the employer is required to base withholding with regard to the identified employees on one exemption.

This section currently allows the Comptroller to notify employers that an individual employee has an unpaid tax liability. In this case, withholding is limited to the number of exemptions allowed on the employee's prior year's income tax return. This Act will take effect July 1, 2005.

Senate Bill 95

Senate Bill 186 (Chapter 466, Acts of 2005) - State Government - International and Interstate Compacts and Agreements - Filing and Publication

This Act requires each unit of state government that enters into an international or interstate compact or other agreement of general application, including an amendment to a compact or agreement, on behalf of the state, to file a copy of the compact or agreement with the Division of State Documents in the Office of Secretary of State. A copy of the compact or agreement does not have to be submitted if it is part of the Annotated Code of Maryland. The Division of State Documents is required to publish the agreement or compact in The Maryland Register.

This Act will take effect October 1, 2005.

Senate Bill 186

Senate Bill 217 (Chapter 98, Acts of 2005) - Research and Development Tax Credit

The Research and Development Tax Credit has two components. The first credit is equal to 3 percent of the Maryland qualified research and development expenses, not exceeding the Maryland base amount for the taxpayer, paid or incurred by the taxpayer during the taxable year. The second credit is equal to 10 percent of the amount by which the Maryland qualified research and development expenses paid or incurred by the taxpayer exceed the Maryland base amount for the taxpayer. The Department of Business and Economic Development (DBED) can only approve credits under each of these provisions that do not exceed $3 million for any calendar year. Therefore, the total credits claimed by all taxpayers for the 3 percent credit cannot exceed $3 million and the total credits claimed by all taxpayers with regard to the 10 percent credit cannot exceed $3 million.

This Act extends the sunset date for the credit from June 30, 2006 to June 30, 2012. The time in which the credits may be earned is extended from 2005 to 2010. The credit will be abrogated at the end of June 30, 2012.

The Act also decreases the number of years that excess credits may be carried over to subsequent years from 15 years to seven years. Finally, the Act requires DBED to prepare and file a report with the Governor and with the General Assembly on the credits approved. The report must contain:

the name of the individual or corporation and the aggregate amount of credits approved in all calendar years for each individual or corporation, and
a summary of the following information:
- the total number of applicants;
- the number of applicants for which a tax credit was approved in each calendar year; and
- the total credits authorized for all calendar years.

This Act will take effect July 1, 2005.

Senate Bill 217

Senate Bill 341 (Chapter 142, Acts of 2005) - Income Tax - Corporations - Payments to Related Entities - Foreign Taxes

This Act modifies an exception to the requirement under TG §10-306.1 that certain corporations must add back intangible transfers to holding companies.

Under legislation enacted last year, a corporation, for purposes of determining Maryland taxable income, is required to add back to its taxable income the otherwise deductible interest expense or intangible expense paid directly or indirectly to one or more related members unless certain exceptions are applicable. The addition is required unless the corporation can show that:

the transaction did not have as a principal purpose the avoidance of tax;
the interest expense was paid pursuant to an arm's length rate or price; and either:
- the related member paid or incurred the interest or intangible expense to an unrelated person;
- the related member paid state taxes in the aggregate on the amount received an effective rate of at least 4 percent; or
- in the case of an interest expense, the related members are banks.

The definition of "aggregate effective tax rate" has been amended to mean the sum of the effective rates of tax imposed by this state, other states or possessions of the United States, the United States, and foreign nations that have entered into comprehensive tax treaties with the United States government, where a related member receiving a payment of interest expense or intangible expense is subject to tax and where the major of the tax imposed included the payment.

This Act will take effect July 1, 2005, and will be applicable to all taxable years beginning after December 31, 2004.

Senate Bill 341

Senate Bill 423 (Chapter 307, Acts of 2005) - Sales and Use Tax - Modular Buildings This Act provides that the sales and use tax rate for the sale of a modular building is the general sales and use tax rate (5 percent) applied to 60 percent of the taxable price. A "modular building" is defined to include single-family or multifamily houses, apartment units, or commercial buildings, and permanent additions to single-family or multifamily houses, apartment units, or commercial buildings, comprised of one or more sections that are:

intended to become real property;
primarily constructed at a location other than the permanent site at which they are to be assembled;
built to comply with the standards for industrialized buildings under Title 12, Subtitle 3 of the Public Safety Article; and
shipped with most permanent components in place.

This Act will take effect July 1, 2005.

Senate Bill 423

Senate Bill 794 (Chapter 175, Acts of 2005) - Arts and Entertainment Districts - Tax Benefits

This Act will modify the current tax benefits available to qualifying residing artists and arts and entertainment enterprises.

The first change is to the definition of "qualifying residing artist." In order to meet the definition, an individual must own or rent residential real property in the county where the arts and entertainment district is located and conduct a business in the arts and entertainment district. This is a change from existing law where the individual has to own or rent residential real property in the arts and entertainment district.

The second change is also to the definition of "qualifying residing artist." This change provides clarifying language that the original intent of the subtraction was for "income from the sale or performance within the arts and entertainment district of an artistic work that the artist wrote, composed, or executed . . . in the arts and entertainment district." (Emphasis added.)

The third change is with regard to the property tax credit. Under existing law, the credit is only available for renovated properties. This Act will extend the credit provisions to new construction.

Although this Act deals primarily with a property tax credit, the change in the definition of "qualifying residing artist" will have an impact on the subtraction modification allowed a qualifying residing artist for the income the artist derives from within the district. Under this Act, the artist will only have to own or rent residential real property in the county in which the district is located and not within the district itself. The artist is not required to reside within the district, the county, or for that matter the state, in order to qualify, as long as the artist owns or rents residential real property within the county where the district is located.

This Act takes effect June 1, 2005. The income tax changes will be applicable to all taxable years beginning after December 31, 2004. The real property changes will be applicable to all taxable years beginning after June 30, 2005.

Senate Bill 794

House Bill 37 (Chapter 191, Acts of 2005) - Sales and Use Tax - Tax-Free Period for Back-to-School Shopping

The purpose of this Act is to designate the five-day period from August 23, 2006 through August 27, 2006 as a tax-free period for back-to-school shopping in Maryland. During the tax-free period, the sales and use tax will not apply to the sale of any item of clothing or footwear, excluding accessory items, if the taxable price of the item of clothing or footwear is $100 or less.

The term "accessory items" is defined to include jewelry, watches, watchbands, handbags, handkerchiefs, umbrellas, scarves, ties, headbands, and belt buckles. This Act will take effect July 1, 2006.

House Bill 37

House Bill 56 (Chapter 521, Acts of 2005) - Consumer Protection - Privacy of Social Security Numbers

The purpose of this Act is to limit the use of an individual's Social Security number under certain circumstances. Except as otherwise provided, a person may not:

publicly post or display an individual's Social Security number;
print an individual's Social Security number on a card required for the individual to access products or services provided by the person;
require an individual to transmit the individual's Social Security number over the Internet unless the connection is secured or the Social Security number is encrypted;
initiate the transmission of an individual's Social Security number over the Internet unless the connection is secure or the Social Security number is encrypted; or
require an individual to use the individual's Social Security number to access an Internet Web site, unless a password, unique personal identification number, or other authentication device is also required to access the Web site.
In addition, unless required by state or federal law, a person may not:
print an individual's Social Security number on any material that is mailed to the individual;
include an individual's Social Security number in any material that is electronically transmitted to the individual, unless the connection is secure or the individual's Social Security number is encrypted; or
include an individual's Social Security number in any material that is transmitted by facsimile to the individual.

For purposes of this new section (§14-3301 of the Commercial Law Article), "person" does not include a unit of state or local government.

This Act will not affect the Comptroller's use of a Social Security number because the prohibition does not apply to the state and, under new §14-3301 of the Commercial Law Article, there is an exemption from the limitations on the use of an individual's Social Security number if it is "required by State or federal law." Section 6109(d) of the Internal Revenue Code provides that an individual's Social Security number issued to an individual for purposes of §205(c)(2)(A) of the Social Security Act shall be used as the identification number for such individual for purpose of Title 26. Thus, the Social Security number is to be used on income tax returns, applications, and other correspondence with IRS. Under TG §2-104, the Comptroller is required to design forms and applications so that they are similar to the forms issued by IRS. This would include the use of an individual's Social Security number as the tax identification number for both federal and state purposes.

This Act will take effect January 1, 2006.

House Bill 56

House Bill 147 (Chapter 444, Acts of 2005) - Property Tax Reduction and Budget Reconciliation and Financing Act of 2005

Nonresident Withholding

Pass-Through Entities. TG §10-102.1 has been modified to increase the tax on the pass-through entity from 4.75 percent to the sum of the rate of tax imposed under TG §10-106.1 (additional state tax based on lowest county rate) and the top marginal state tax rate for individuals under TG §10-105(a)(4). In addition, the provisions of this section have been changed to provide for the payment of tax on behalf of nonresident entities. The tax rate for corporations under TG §10-105(b) will be applied to the sum of each nonresident entity member's distributive share or pro-rata share of a pass-through entity's nonresident taxable income.

A member of a pass-through entity that is itself a pass-through entity must comply with the provision of this section with respect to any of its members that are nonresidents or nonresident entities.

The tax imposed under this section does not apply to a publicly-traded pass-through entity that has agreed to file with the Comptroller an annual information return reporting the name, address, taxpayer identification number, and other information requested by the Comptroller if each nonresident or nonresident entity member's distributive share or pro-rata share of the pass-through entity's nonresident taxable income for the taxable year exceeds $500.

The tax imposed under this section also does not apply with respect to the direct or indirect distributive share or pro rata share of a member that is a real estate investment trust as defined by §856 of the Internal Revenue Code A definition of "member" is being added. "Member" is defined to mean:

a shareholder of an S corporation;
a general or limited partner of a partnership, limited partnership, or limited liability partnership; or
a member of a limited liability company.
"Nonresident entity" is defined to mean an entity that is not formed under the laws of the state and is not qualified by or registered with the Maryland Department of Assessments and Taxation to do business in the state. "Pass-through entity" is defined to mean:
an S corporation;
a partnership; or
a limited liability company that is not taxed as a corporation.

TG §10-701.1 has been amended to provide that a corporation may claim a credit against the state income tax in the amount of the tax paid by a pass-through entity that is attributable to the corporation's share of the pass-through entity's nonresident taxable income.

These provisions of the Act will take effect July 1, 2005 and will be applicable to all taxable years beginning after December 31, 2004.

Wagering. TG §10-908 has been amended to provide that a payor of winnings derived from wagering that is subject to withholding shall withhold a rate equal to the sum of the rate of tax imposed under TG §10-106.1 (special nonresident tax rate, currently 1.25 percent) and the top marginal state income tax rate for individuals (currently 4.75 percent).