The Maryland House of Delegates is considering legislation (House Bill 426) that would impose sales and use tax on digital products and sales tax on digital codes. If signed into law, Maryland would begin taxing digital products and digital codes on July 1, 2019. House Bill 426 was read for the first time in the Ways and Means Committee on January 31, 2019.

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Maryland Tax Court holds that Maryland’s limitation of interest on refunds resulting from the US Supreme Court’s decision in Comptroller of the Treasury of Maryland v. Wynne violates the US Constitution.

  • In 2014, the Maryland legislature passed a law to retroactively limit the statutory interest rate on refunds related to the Comptroller of the Treasury of Maryland v. Wynne decision.
  • The Tax Court held that the same rationale used by the Supreme Court in finding the law at issue in Wynne was in violation of the dormant commerce clause also applies to the limited interest rate on Wynne refunds.
  • The limited interest on Wynne refunds is also the subject of a separate class action lawsuit filed in the Circuit Court of Baltimore City, which had previously been dismissed due to Plaintiff’s failure to exhaust administrative remedies.

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On April 24, Maryland Governor Larry Hogan signed Senate Bill 1090 and House Bill 1794, which adds Maryland to the growing list of states that are moving towards a single sales factor formula to apportion corporate net income.

  • Under prior Maryland law, most corporations generally used a three-factor formula based on in-state property, payroll and a double-weighted sales factor.
  • The newly enacted Bills provide a four-year phase-in period to transition from Maryland’s current three-factor formula to a single sales factor formula by tax year 2022.
  • Interestingly, the Bills also allow certain “Worldwide Headquartered Companies” to elect to use the current three-factor formula rather than the new single sales factor formula.

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This installment of A Pinch of SALT examines the comptroller of Maryland’s practice of attributing in-state operating companies’ apportionment factors to affiliated out-of-state holding companies. This article posits that this type of attribution violates the internal consistency test reflected in the US Supreme Court’s dormant commerce clause doctrine.

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In recent years, the tax community has engaged in an effort to promote transparency in tax administration. This effort culminated in Maryland with the passage of Senate Bill 843 by the 2016 General Assembly and was enacted in Chapter 582 of the Acts of 2016 (the “Act”). Included in a statute that largely addressed the evaluation process of certain tax credits are four lines that could provide Maryland taxpayers with the ability to obtain guidance through private letter rulings (“PLRs”).

Specifically, the Act required the Comptroller to adopt procedures and protocols related to the implementation of a PLR process intended to provide guidance to taxpayers. The legislation was hailed in tax blogs and tax publications, such as Tax Analysts and the Council On State Taxation’s Scorecard on Tax Appeals & Procedural Requirements. In their article for the October 2017 edition of Tax Talk, Eversheds Sutherland attorneys Jessica Eisenmenger and DeAndre Morrow discuss that the kudos may have been premature, as Maryland’s 2017 legislative session has called into doubt the future prospects of the Act’s PLR process.

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By Robert Merten and Andrew Appleby

The Maryland Tax Court granted a summary judgment motion exempting a Vermont-licensed insurance company from almost $24 million in corporate income tax, interest, and penalties. The short two-page order swiftly cites to and expressly follows the court’s previous order in the 2015 case, Nat’l Indem. Co. v. Comptroller of the Treasury, M.T.C. No. 14-IN-OO-0433 (Md. Tax Ct. 2015), in which the court determined taxpayers “engaged as a principle in the business of writing insurance contracts, surety contracts, guaranty contracts, or annuity contracts” are statutorily exempt from Maryland corporate income tax. The court determined in this case that because the insurance company was “engaged in the insurance business,” the court saw “no reason to distinguish this case from National Indemnity and will rely on the analysis therein,” resulting in a full taxpayer victory at the summary judgment stage. Leadville Ins. Co. v. Comptroller of the Treasury, M.T.C. No. 13-IN-OO-0035 (Md. Tax Ct. Mar. 30, 2017).

By Ted Friedman and Madison Barnett

The Maryland Tax Court held that the Comptroller’s policy of not allowing carryforwards of unsubtracted exempt federal obligation interest violates the Supremacy Clause of the U.S. Constitution. Under the Comptroller’s policy, interest earned on Maryland obligations is subtracted in its entirety when computing Maryland taxable income. As a result, Maryland obligation interest is included in the taxpayer’s Maryland NOL and can be carried forward and deducted in later years. The same is not true for interest earned on federal obligations. The Comptroller allows the federal obligation interest to be deducted until there is no Maryland taxable income, but any excess may not be used to increase the taxpayer’s Maryland NOL carryforward. The Court determined that the Comptroller’s policy violates the Supremacy Clause by discriminating against those who hold federal obligations in favor of those who hold state obligations. As a result, the taxpayer was permitted to carryforward its excess federal obligation interest deductions. Branch Banking & Trust Co. v. Comptroller of the Treasury, No. 13-IN-OO-0076 (Md. Tax Ct. Aug. 12, 2016).

By Chris Mehrmann and Amy Nogid

The U.S. Court of Appeals for the Fourth Circuit affirmed the Maryland district court’s determination that it lacked specific personal jurisdiction over a Brazilian poultry exporter, BRF S.A. (BRF), under the Due Process Clause of the U.S. Constitution. Perdue Foods LLC (Perdue), which sold poultry using the “PERDUE” mark, bought the underlying action against BRF, which sold poultry using the “PERDIX” mark, alleging that BRF breached an agreement with a Maryland choice-of-law clause under which it had agreed to abandon using a version of its PERDIX mark to avoid customer confusion. Id. The district court granted BRF’s motion to dismiss for lack of personal jurisdiction, finding that Perdue failed to allege facts sufficient to establish that BRF had the requisite minimum contacts with Maryland. Id. In affirming the lower court’s decision, the Fourth Circuit explained that BRF had no employees or property in Maryland, conducted no business in Maryland, and that the alleged breach of the agreement occurred outside of Maryland. Id. Although the Court of Appeals acknowledged that personal jurisdiction may be established through a single contract with a resident of the forum, and that the choice-of-law provision weighs in favor of jurisdiction, the court found that the agreement expressly prevented BRF from doing business in Maryland with its trademark and therefore did not demonstrate that BRF purposefully availed itself of the privilege of doing business in the state. Perdue Foods LLC v. BRF S.A., No. 14-2120 (4th Cir. Feb. 19, 2016).

From September 1, 2015, through October 30, 2015, the Comptroller of Maryland will administer a Tax Amnesty Program for tax periods beginning before December 31, 2014. Eligible taxpayers that participate in the Program will receive a waiver of certain civil penalties and a reduction of 50% of the interest associated with certain delinquent taxes. 

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