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INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
Maryland
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BREAKING NEWS: Maryland Proposes (French) Tax on Advertising – Digital Platforms and Advertisers Beware!

by and | Jan 10, 2020 | , , ,

On January 8, SB 2 was introduced to establish a new digital advertising gross revenue tax of up to 10% on “annual gross revenues of a person derived from digital advertising services in the state.” This uncharted new tax would make Maryland the first state or locality in the United States to impose a targeted tax on the gross revenue of digital advertising services.

The bill defines “in the state” as appearing on the user’s device located in the state (determined based on either the user’s IP address or reasonable knowledge). “Digital advertising services” is defined as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The definition uses the word “includes” rather than “means,” enabling the definition to be read even more broadly. “Digital interface” is defined as “any type of software, including a website, part of a website, or application, that a user is able to access.”

The tax applies at a sliding scale:

  • 2.5% for person with global annual gross revenues of $100 million or more
  • 5% for person with global annual gross revenues of $1 billion or more
  • 7.5% for person with global annual gross revenues of $5 billion or more
  • 10% for person with global annual gross revenues of $15 billion or more

The bill would require quarterly estimated tax payments and an annual return and provides that willful failure to file a digital advertising gross revenues tax return is a misdemeanor subject to a $5,000 fine and 5 years’ imprisonment.

The bill is co-sponsored by Senator Thomas Miller (D), the outgoing Senate President, and Senator William Ferguson (D), the incoming Senate President. Maryland legislative leaders have been hinting at new taxes on the digital economy, digital downloads, and streaming subscriptions as they decide how to fund a proposed $825 million per year education spending increase. Governor Hogan (R) opposes the education spending increase as too expensive, amounting to a $6,000 per family tax increase, and in response Democrats last week ruled out raising income, sales, or property tax rates. We therefore may see additional digital taxation bills aside from this one.

Because Maryland would tax digital advertising but not tax non-digital advertising, the tax is a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The use of an arbitrary threshold of global annual gross revenues, while perhaps politically popular, serves to tax larger global advertising service providers at a higher tax rate than their domestic counterparts, in violation of the Commerce Clause of the US Constitution.

The proposal also raises serious First Amendment (singling out digital commercial speech for a punitive tax) and Equal Protection (lack of rational basis for punitive tax on digital advertising) issues. For example, the Maryland Court of Appeals has held that municipal taxes on advertising media were unconstitutional for singling out for taxation newspapers and radio and television stations entitled to first amendment immunities.  See City of Baltimore [...]

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Tax Amnesty Hits the Midwest (and Beyond)

by , and | Jun 12, 2015 | , , , , , , , , , , , , ,

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 [...]

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U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

by and | May 21, 2015 | , , , , , , , , , , , , ,

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 [...]

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Plain and Simple: Maryland Tax Court Holds Insurance Company is Exempt from Corporate Income Taxes

by | May 13, 2015 | , , ,

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 [...]

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Maryland Offers Attractive Amnesty Program – Even for Taxpayers Under Audit!

by , and | Apr 23, 2015 | , , , , ,

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.



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State Revenue Departments Misapplying Federal Tax Law

by | Sep 9, 2014 | , , , , , ,

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 [...]

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U.S. Supreme Court Turns its Attention to State Tax, Agrees to Hear “Double Taxation” Case

by | Jun 2, 2014 | , ,

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 [...]

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Maryland Madness: An Incentives Plot for House of Cards

by | Apr 28, 2014 | ,

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.



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