With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program will be disappointed to know that the authorizing legislation specifically prohibits them from participating in the upcoming amnesty.

The amnesty program is applicable to all “listed taxes” collected by the Department, including sales and use taxes, corporate and personal income taxes, financial institutions tax and gas taxes. See Indiana Code § 6-8.1-1-1 for the complete list. Unlike several of the other amnesty programs discussed that apply to more recent liabilities, the Indiana amnesty is only statutorily authorized for liabilities due before January 1, 2013 (i.e., 2012 or earlier). While the Department is not prevented from settling more recent liabilities incurred in 2013 and 2014, such an arrangement would be outside the scope of the statutory amnesty provisions.

The benefits of the upcoming program include abatement of interest, penalties, collection fees and costs that would otherwise be applicable, release of any liens and no civil or criminal prosecution. Indiana taxpayers should be aware that if an eligible liability is not paid during the amnesty period (and is subsequently discovered by the Department) penalties are doubled under the statute.

Arizona

On March 12, 2015, Governor Doug Ducey approved a budget package that included a bill (SB 1471) creating a tax recovery (amnesty) program for taxpayers with outstanding liabilities. The program is scheduled to run from September 1, 2015, through October 31, 2015, and applies to all taxes administered by the Department of Revenue, except withholding and luxury taxes. Taxpayers that come forward with tax liabilities that could have been assessed before 2014 (or before 2015 in the case of non-annual filers) will receive abatement of all civil penalties and interest. Taxpayers that were a party to a closing agreement with the Department during the liability period are not eligible for the program; however, nothing in the statute would appear to prevent a taxpayer that is currently under audit from participating in the program.

As a consequence of applying to the program, the inclusion of the outstanding debt in a taxpayer’s application is considered to be a waiver of the taxpayer’s administrative and judicial appeal rights.

South Carolina

On June 8, 2015, Governor Nikki Haley signed a bill (S. 526) giving the Department of Revenue (Department) authority to schedule and execute a three-month tax amnesty period at their discretion. The bill specifically allows the Department to waive all penalties and interest (or a portion of them at its discretion) for taxpayers that voluntarily file delinquent returns and pay all taxes owed (i.e., the Department cannot waive penalties and interest on a period-by-period basis). Taxpayers with an appeal pending may only participate in the program if they pay all the taxes owed. While payment of the liability is required to participate, it will not constitute an admission of liability or a waiver of the appeal.

Taxpayers should note that any debts not fully paid within an agreed-upon post-amnesty period will be subject to a 10 percent collection and assistance fee, in addition to the penalties and interest otherwise owed. The bill grants authority for imposition of this fee for up to one year after the close of the extended amnesty period.

Practice Note

Now is the time for taxpayers with outstanding tax obligations in any of the state’s offering amnesty (including Maryland) to consider whether the issues can and should be resolved through the amnesty program. In deciding whether to avail oneself of the amnesty offerings, taxpayers should be aware that failure to participate in many states (including Indiana and South Carolina) can lead to increased penalties and fees (the infamous “amnesty hammer”) if the delinquent obligation subsequently surfaces.

On May 18, the U.S. Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus be subject to taxation on all of their income in both states.

Although New York State grants a credit to residents for taxes paid to another jurisdiction, that credit is only for taxes paid “upon income derived” from those other jurisdictions. N.Y. Tax Law § 620. As such, New York State does not grant a credit for taxes paid to another jurisdiction on income earned from intangible property, such as stocks, because income earned from intangible property is not ‘derived from’ any specific  jurisdiction.

To illustrate using an example, suppose an investment banker is unquestionably a domiciliary of New Jersey and has an apartment, i.e., permanent place of abode, in New York that he uses only occasionally. Further, suppose that the investment banker spends more than 183 days in New York during a tax year by going to his office in New York on most workdays. In such a case, the investment banker is a resident of both New Jersey and New York and subject to tax as a resident in both states on his entire worldwide income. New York does not give a credit for taxes paid to New Jersey on income derived from intangible property, and thus the investment banker pays tax on this income twice, once to New Jersey and once to New York, clearly disadvantaging interstate commerce and resulting in double taxation.

This is not some hypothetical example. This is actually the fact pattern in In the Matter of John Tamagni v. Tax Appeals Tribunal of the State of New York, 91 N.Y.2d 530 (1998). In that case, the New York Court of Appeals (New York State’s highest court) held that New York State’s taxing scheme did not violate the dormant Commerce Clause and did not fail the internal consistency test. The validity of the Court of Appeals’ decision is seriously called into question under the Wynne case.

The Court of Appeals, relying upon Goldberg v. Sweet, held that the dormant Commerce Clause did not apply to residency-based taxes because those taxes were not taxing commerce, but rather a person’s status as a resident. However, the U.S. Supreme Court’s decision in Wynne not only repudiates the very dicta from Goldberg v. Sweet cited by the New York Court of Appeals in Tamagni, but the U.S. Supreme Court also determined that even if a state has the power to impose tax on the full amount of a resident’s income, “the fact that a State has the jurisdictional power to impose a tax [under the Due Process clause of the Constitution] says nothing about whether that tax violates the Commerce Clause.” After Wynne, it is clear that the dormant Commerce Clause applies to residency-based personal income taxes.

The second reason that the vitality of the Tamagni decision is in question is its application of the internal consistency test. The Court of Appeals held that even if the dormant Commerce Clause applied, the internal consistency test was not violated because the tax at issue was imposed upon a purely local activity and thus could not violate the Complete Auto tests. However, as discussed above, New York State’s lack of a credit for taxes paid to other jurisdictions mirrors the lack of a credit under Maryland’s county income tax scheme.

New York State taxpayers should be cognizant of the Wynne decision and should consider filing refund claims if they have paid— or will pay—tax to New York State as a statutory resident (i.e., not as a New York domiciliary). One would expect the New York State Department of Taxation and Finance to be quite resistant to granting such refunds and likely to vigorously defend the existing taxing scheme.

It may be worthwhile to note that this problem of double taxation was acknowledged and addressed in an agreement executed in October 1996 by the heads of the revenue agencies of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. Under that agreement, the “statutory resident” state would provide a credit for the taxes paid by the individual on his or her investment income to his/her state of domicile. Unfortunately, that agreement was never implemented through legislation— maybe now is the time for that to be done.

Finally, a word about New York City: New York City imposes a personal income tax on residents, allowing no credit for taxes paid to other jurisdictions. However, New York City does not impose a tax on non-residents, making its personal income tax different than the Maryland county income tax. Thus, the constitutionality of the New York City personal income tax is not specifically addressed by the U.S. Supreme Court’s decision. However, similar to the New York State definition of resident, a person can be a resident in two different jurisdictions under the New York City definition of resident. As such, New York City’s personal income tax could be imposed twice on a person if the person is a domiciliary of one state and a statutory resident in another. Thus, the tax potentially fails the internal consistency test.

Although taxpayers often complain that complying with the tax laws imposed by the numerous state and local taxing jurisdictions that exist in the United States is a burdensome process, many of these tax statutes also provide benefits to taxpayers in the form of exemptions, deductions and credits.  Taxpayers who structure their affairs according to the plain language of these favorable tax laws can be frustrated when state revenue departments attempt to deny them the benefits of the statute.  A recent opinion from the Maryland Tax Court supports the argument commonly advanced by taxpayers in these situations – that when the language of a statute is clear, there is no room for the revenue department to interpret the statute in a contrary manner.  See National Indemnity Co. v. Comptroller of the Treasury, Dkt. No. 14-IN-OO-0433 (Md. Tax Ct. April 24, 2015).

Maryland, like many states, exempts “insurance companies” from the payment of corporate income taxes because these entities are generally subject to tax under some other section of the tax law, insurance law or both.  Also as in many states, insurance companies are defined for purposes of Maryland’s corporate income tax statutes by reference to the state’s insurance law.  The taxpayer in National Indemnity Co. plainly fit within the definition of an insurance company under the Maryland insurance statutes because it was “in the business of writing insurance contracts.”  See Md. Code Insurance § 6-101(a).  While the facts of the case do not disclose whether the company did in fact pay taxes under a different statute, insurance companies in Maryland are subject to tax on all new and renewal gross direct premiums that are allocable to the state and written during the preceding calendar year.  See Md. Code Insurance § 6-102.  Nevertheless, the Maryland Comptroller’s office contended that when an insurance company invests money similar to a commercial bank, it should not be afforded the statutory exemption from corporate income tax.  The Tax Court rejected the Comptroller’s argument, noting that under the plain language of the statute (as well as under the Comptroller’s regulations and other published guidance), insurance companies similar to the taxpayer were not subject to Maryland corporate income tax.

In National Indemnity, Maryland’s corporate income tax statute clearly exempted insurance companies from the payment of corporate income taxes, and clearly defined insurance companies by reference to the Maryland insurance law.  The Comptroller’s argument appeared to be that, despite the fact that the taxpayer at issue fit within the statutory definition of an insurance company, it wasn’t “acting like” an insurance company and therefore shouldn’t be taxed like an insurance company.  While the National Indemnity opinion is short, its import is clear—where the legislature has plainly spoken on a subject, the revenue department is obligated to follow the plain language of the statute, whether that statute is favorable to the revenue department or not.  Companies should also be aware that Maryland (like a number of other states) does allow the prevailing party in a civil action to recover the costs of the action plus reasonable expenses (including reasonable attorneys’ fees) if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification.  See Md. Gen. Rule 1-341.  Thus, taxpayers facing a revenue agency that is attempting to contravene the plain language of a statute without substantial justification should consider whether litigation costs are potentially recoverable from the agency.

Starting September 1, 2015, the Comptroller of Maryland (Comptroller) will offer qualifying taxpayers that failed to file or pay certain taxes an opportunity to remit tax under very attractive penalty and interest terms.  The 2015 Tax Amnesty Program (Program) is the first offered in Maryland since 2009, when the state raised nearly $30 million, not including approximately $20 million collected the following year under approved payment plans.  The amnesty program offered before that (in 2001) brought in $39.4 million.  Consistent with the Maryland amnesty programs offered in the past, the Program will apply to the state and local individual income tax, corporate income tax, withholding taxes, sales and use taxes, and admissions and amusement taxes.

The Program was made law by Governor Larry Hogan when he signed Senate Bill 763, available here, after two months of deliberation in the legislature.  While the Program is scheduled to run through October 30, 2015, the Comptroller has a history of informally extending these programs beyond their codified period.  For companies that are nervous about potential assessments following the Gore and ConAgra decisions, the amnesty offers an opportunity that should be evaluated.

Perks  

The Program’s main benefits include:

  1. Waiver of 50 percent of the interest;
  2. Waiver of all civil penalties (except previously assessed fraud penalties); and
  3. A bar on all criminal prosecutions arising from filing the delinquent return unless the charge is already pending or under investigation by a state prosecutor.

Qualification

The Program is open to almost all businesses, even if under audit or in litigation.  The statute provides for only two classifications of taxpayers that do not qualify:

  1. Taxpayers granted amnesty under a Maryland Amnesty Program held between 1999-2014; and
  2. Taxpayers eligible for the 2004 post-SYL settlement period relating to Delaware Holding Companies.

Because the Program’s enacting statute does not prohibit participants from being under audit, or even those engaged in litigation with the Comptroller, even taxpayers with known issues and controversy may find the amnesty an attractive vehicle to reach resolution of a controversy with the state.

Practice Note

Because the range of taxpayers eligible for the Program is so broad, we encourage all businesses to evaluate whether participation will benefit them.  Given that past Maryland amnesty programs excluded taxpayers over a certain size (based on employee count), large companies who were not able to resolve uncertain exposure in the state should evaluate this new offering.  If your business is currently under audit (or concerned about any tax obligations from previous years), please contact the authors to evaluate whether the Program is right for you.

State income tax laws generally build on federal tax law.  The typical pattern is to begin the calculation of state taxable income with federal taxable income and then to modify it by adding or subtracting items where state tax policies differ from federal tax policies.  As a result, a corporation’s state taxable income can be affected by the application of the federal Internal Revenue Code.  State revenue departments generally do not consider themselves bound by Internal Revenue Service determinations respecting the application of federal tax law and believe that they are free to interpret the Internal Revenue Code as they see fit.  Unfortunately, this has led to problems because state tax auditors often are not well trained in federal tax principles.  We had an instance earlier this year in which an auditor claimed that the merger of a wholly-owned subsidiary into its corporate parent was taxable because there was an increase in the parent’s retained earnings.  The merger was a plain vanilla tax-free liquidation under Sections 332 and 337 of the Internal Revenue Code (there was no intercompany debt and the subsidiary was clearly solvent), but sending copies of these provisions to the auditor left him unmoved.  We finally got him to back down by showing that the parent’s increase in retained earnings was matched by a decrease in the subsidiary’s retained earnings so that there was no overall increase.  As we explained to the client, a win is a win, even if for the wrong reasons.  Nevertheless, if the auditor had been properly versed in the most basic federal corporate tax principles, this exercise would not have been necessary.

Two recent decisions illustrate misapplications of federal tax law by state revenue departments.

The Idaho Tax Commission recently held that a subsidiary’s net operating loss (NOL) carryovers did not pass to its parent in a merger of the subsidiary into the parent.  The parent did not continue to operate the business of the merged subsidiary and the Commission held that “based on IRC §382, the Petitioner cannot carry the loss forward after the merger.”  Idaho State Tax Commission Ruling No. 25749 (Apr. 17, 2014).  The Commission’s statement of federal tax law is incorrect.  Section 382 of the Internal Revenue Code does not apply to a merger of a wholly-owned subsidiary into its parent.  Because of constructive ownership rules, no change in ownership is deemed to occur.  Moreover, Section 382 does not prevent an NOL from passing to the surviving company in a merger; it simply limits the extent to which the NOL can be used.  Although it is true that the limitation is zero for years in which the merged company’s business is discontinued, the NOL is not destroyed.  If the parent later sells assets received from the subsidiary that had built-in gain at the time of the merger, the loss can be used to offset the gain.

Discussions that we have had with the Commission after the decision came out indicate that the Commission had concluded that there was real doubt as to whether the subsidiary’s losses were valid in the first place.  Nevertheless, its explanation of the reasons for preventing the loss from passing to the parent are incorrect as a matter of law and may be a problem to taxpayers if Commission auditors take the Commission’s language at face value in the future.

NIHC, Inc. v. Comptroller of the Treasury (Docket 63, Court of Appeals of Maryland) (August 18, 2014) involved corporations that were filing consolidated federal income tax returns but separate Maryland income tax returns.  A subsidiary distributed appreciated property to its parent in a transaction in which, had they been filing separate federal income tax returns, a gain would have been taxed to the subsidiary under Section 311(b) of the Internal Revenue Code.  Under the federal consolidated return regulations, however, the subsidiary’s gain was “recognized” but “deferred.”  This means that the gain was not immediately taxed but would have been taxed in later years upon the occurrence of certain events (e.g., a breakup of the consolidated return group, the transfer of the appreciated property by the parent outside the group, or the depreciation or amortization of the transferred property by the parent).  Under the federal consolidated return regulations, the subsidiary recognized income gradually over the next 15 years as the parent amortized the appreciated property.  Thus, the subsidiary reported income in later years but not in the year of the distribution.

In the litigation, the subsidiary took the position that it should have recognized the gain for Maryland income tax purposes in the year of the distribution because the corporations were filing separate Maryland income tax returns.  In other words, the taxpayer argued that the deferral principles of the federal consolidated return regulations, which were predicated upon the filing of consolidated returns by the corporations, should not apply for Maryland tax purposes because the corporations were filing separate Maryland tax returns.  The statute of limitations for assessing deficiencies for a taxable year of the distribution had expired.  The court, without discussing the applicable principles, held that the subsidiary made its bed and should lie in it and should not profit by the mistake that it claimed to have made in filing its tax returns for the year of the distribution.  The court failed to analyze the federal tax principles and their relationship with Maryland tax principles.

This may have been a classic case of bad facts making bad law.  The subsidiary had been established as an intangible holding company and the court made it clear that it disapproved of the taxpayer’s alleged attempt to divert income from Maryland through the intangible holding company device.  Nevertheless, the court clearly misapplied federal tax principles.

The takeaway here is that practitioners should not assume that state tax auditors will understand and correctly apply federal tax principles.  It may be necessary to call upon a company’s federal tax advisors to explain these principles to the auditors in simple terms.  It may also be necessary to talk to senior people in the department of revenue, who are more likely to be knowledgeable about federal tax rules than are the auditors.

The Supreme Court granted the petition for certiorari filed by the Maryland Comptroller of Treasury in Comptroller v. Wynne, Dkt. No. 13-485 (U.S. Sup. Ct., cert. granted May 27, 2014).  The central issue in Wynne is whether a state must allow its residents a credit for income taxes paid to other states, in a manner sufficient to prevent double taxation of income from interstate commerce, to avoid violating the fair apportionment and discrimination prongs of the dormant Commerce Clause.

Like most states, Maryland taxes its residents on their entire income, wherever earned, and permits a credit for income tax paid to other states, limited to the amount of Maryland tax on the income taxed by other states.  But Maryland’s income tax includes both a state and a county tax component, and Maryland permitted a credit for taxes paid to other states only with respect to its state income tax.  The state rate was 4.75 percent and the county tax rate applicable to the Wynnes was 3.2 percent (which could vary by county).  The county tax was imposed and administered by the state on the same tax base as the state income tax, and residents file a single return that reflects both state and county income taxes.  Thus, Maryland provided a credit only against the Maryland state income tax, but not the substantial county income tax, on the income taxed by other states, resulting in a form of double taxation of that income (i.e., by the other state and by the Maryland county).

The Wynnes reported substantial income on their 2006 individual return from business activities in interstate commerce.  They owned 2.4 percent of an S corporation doing business in 39 states, and paid income tax to most of those states on the income that flowed through to their individual return.  The Wynnes reported $2.7 million of income and $126,636 of Maryland state income tax (not including the county income tax portion) prior to credits, and claimed a credit of $84,550 for taxes paid to other states.  The Maryland Comptroller permitted the Wynnes to claim a credit against the state income tax, but not the county portion of the income tax, for taxes paid to other states.  Maryland’s highest court, the Court of Appeals, agreed with the Wynnes that they suffered double taxation of the income in violation of the dormant Commerce Clause doctrine that taxation of multistate business requires fair apportionment and no discrimination against interstate commerce, citing Complete Auto Transit v. Brady, 430 U.S. 274 (1977) and other Supreme Court cases.

In its petition for certiorari, the Maryland Comptroller relied upon settled Due Process doctrine that states have plenary power to tax all of the income of their residents.  The Comptroller’s petition essentially ignored the Commerce Clause issues raised by the Maryland Court of Appeals.

The U.S. solicitor general filed an amicus curiae brief supporting the Maryland Comptroller’s position, recognizing the different standards imposed by the Due Process Clause and the Commerce Clause but nonetheless contending that the longstanding Due Process Clause precedents permit states to tax all of the income of their residents without regard to the Commerce Clause.  The solicitor general’s support likely was a significant factor in the Supreme Court’s decision to grant the Maryland Comptroller’s petition.

Comptroller v. Wynne is an important case because growing numbers of large multistate businesses are conducted in pass-through entity form as S corporations, partnerships or limited liability companies, and the income from these enterprises often is reported on individual tax returns.  Despite the substantial precedent supporting a state’s right to tax all of the income of resident individuals without a credit for taxes paid to other states, this Due Process doctrine collides with Commerce Clause principles that prevent undue burdens on interstate commerce when applied to income that resident individuals receive as pass-through income from entities clearly engaged in interstate commerce.  A decision in favor of the Maryland Comptroller has the potential to validate double taxation by states of their residents on income earned in interstate commerce, while a ruling for the taxpayers has the potential to cost state and local governments tens of millions of dollars per year.

The Wynne case may raise other significant Due Process and Commerce Clause issues, including whether any distinction should be drawn between double taxation attributable to county rather than state level income taxes and whether a substantial but imperfect credit for taxes paid to other states can satisfy the Commerce Clause doctrines.  The final decision may have far reaching implications for taxation of individuals, trusts and other taxpayers that traditionally have been protected by Due Process limits on state taxation, but whose protection by the Commerce Clause has been uncertain.

Somewhere in Hollywood:

House of Cards Screenwriter 1: Let’s have an episode where a business getting tax breaks puts on the lobbying pressure to get even more, only to cross the wrong legislator and nearly lose everything.

House of Cards Screenwriter 2: That’s too unrealistic – it could never happen.

Apparently the Maryland legislature disagrees. Media Rights Capital, the studio producing House of Cards, threatened to move filming to another state if the Maryland legislature would not increase the amount of film tax credits available to support filming the series’ third season. In response Bill Frick of the Maryland House of Delegates submitted an amendment to Senate Bill 172, the Budget Reconciliation and Financing Act of 2014, allowing the state to use the power of eminent domain to acquire a film production company’s real, tangible and intangible private property for just compensation if such production company claimed over $10 million in credits (i.e., Media Rights Capital) and ceased film production is the state. The bill as amended passed the House of Delegates but died in conference with the Senate, as the final minutes to the end of the General Assembly session ticked by. With the film credit budget now set at $15 million – not the $18.5 million desired but more than the $7.5 million originally budgeted – it remains to be seen whether Media Rights Capital will walk.

This is the type of legislative risk that we touched on in our recent article published in State Tax Notes, “Locking In Economic Development Incentives To Minimize Risks.” At the end of the day, a state is a sovereign body that, depending on how an incentives package is structured, may have substantial leeway to change the deal if the relationship with the business sours. And even if a state is constrained in adjusting the package in some respects – Delegate Frick’s amendment may have raised a takings clause issue – there often is nothing stopping a state from exacting separate punitive measures in retribution.

But Media Rights Capital was not the only one facing risk. The Old Line State is putting its reputation at stake. The sheer fact that such punitive legislation was proposed and passed the House of Delegates may chill future filming or other incentive agreements in Maryland.