The 2016 legislative session in Maryland saw the enactment of several noteworthy pieces of tax legislation that will change aspects of compliance for businesses, offer new tax savings opportunities, and provide more transparency for taxpayers regarding the Comptroller’s interpretation of the state’s tax laws and regulations.
In the area of compliance, Maryland employers are now required to provide W-2 withholding statements to employees and to the state by January 31, which is a month earlier than in previous years (SB 185/HB 1333). Additionally, corporate income tax return due dates now conform to the federal due date changes, and will be on April 15th beginning in tax year 2016 (SB 288/HB 484).
Maryland enacted several taxpayer friendly pieces of legislation, including:
Thanks to efforts made by tax practitioners in the state, legislation (SB 843) was enacted with the inclusion of a provision that will finally allow taxpayers to receive informal guidance from the Comptroller in the form of a private letter ruling. Currently, to receive guidance from the Comptroller, taxpayers must follow the burdensome rules for requesting a declaratory ruling. The legislation requires the Comptroller to implement a process for the issuance and publication of the rulings. Although the exact process and all of the features of the program are not clear, it is expected that tax practitioners will be permitted to submit ruling requests on behalf of anonymous taxpayers; the Comptroller will not charge a fee for issuing the ruling; and, the rulings will be published on the Comptroller’s website. The process will likely resemble the private letter ruling procedures in Virginia.
Some of the bills that did not pass in the 2016 session include the following:
A number of bills that were enacted or not enacted in this year’s session originated from recommendations made in the final report issued by the Maryland Economic Development & Business Climate Commission (i.e., The Augustine Commission) in January of 2016. Some of the measures that did not pass this year could be revisited next year. The most likely of these is the adoption of single-sales factor apportionment, which a number of other states and the District of Columbia have enacted in recent years. The Commission was strongly opposed to Maryland implementing corporation combined reporting, a measure that has failed to pass for several successive years.
If you have any questions about Maryland taxes, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301-231-6200.
Maryland taxpayers that have received refunds or filed refund claims because of the decision in Comptroller v. Wynne can preserve their right to receive the full 13% interest taxpayers are typically paid on refunds. Last year, Maryland enacted legislation stating taxpayers receiving Wynne-related refund claims would only be paid the prime interest rate rounded to the nearest whole number, instead of the general rate of 13%. Thus, the current interest rate being paid on Wynne refund claims is only 3%; the legislation is expected to be challenged in court on constitutional grounds. A number of taxpayers seeking the full 13% interest rate have already filed appeals with the Comptroller.
In anticipation of litigation on this issue, the Comptroller has established a procedure whereby taxpayers can challenge the interest they received on their Wynne refunds. A summary of the procedure is below.
The Comptroller has indicated that it is currently processing protective refund claims filed in 2014. All protective claims (i.e., claim filed before the Wynne decision was issued in May of 2015) are expected to be processed by the end of the year. This means that most of the refund claims that have been submitted since the Wynne decision was issued will likely not be processed until 2016.
If you have questions related to a Wynne refund claim or another Maryland tax issue, please contact your Aronson tax advisor or Michael L. Colavito, Jr.at 301-231-6200.
On August 4, 2015, the Maryland Comptroller’s office hosted an informal gathering for tax practitioners to ask questions of the Comptroller’s staff regarding the upcoming Maryland tax amnesty program, as well as the processing of refund claims related to the Wynne decision.
The tax amnesty program, which will take place from September 1, 2015 to October 30, 2015, gives Maryland taxpayers the opportunity to come clean on any outstanding tax liabilities. The program allows for the waiver of civil penalties and one-half of any outstanding interest due to the nonreporting, underreporting, and/or nonpayment of Maryland state and local income tax, withholding taxes, sales and use taxes, and admissions and amusement taxes.
In the August 4th meeting, the Comptroller’s staff clarified that the amnesty program does not apply to tax year 2014, as amnesty is only being offered for tax liabilities arising from returns due on or before December 31, 2014. It was further stated that the Comptroller’s expectation is that taxpayers participating in the program will disclose their tax liabilities for all back tax years. Thus, taxpayers with unfiled returns for more than three prior years should consider participating in the Comptroller’s voluntary disclosure program, which typically limits a taxpayer’s disclosure and payment of outstanding tax liabilities to the most recent three-year period while foreclosing the Comptroller’s ability to assess the taxpayer for any year prior to such period. The Comptroller anticipates that the applications for participation in the amnesty program will be available on its website by August 28, 2015. Taxpayers that have significant outstanding Maryland tax liabilities can benefit from entering into the amnesty program, but they should consider whether the voluntary disclosure program is a better option.
The Comptroller’s staff also updated practitioners on its processing of Wynne-related refund claims. For readers not familiar with the decision issued by the U.S. Supreme Court in Wynne, please see Aronson’s blog on the Court’s ruling. The Comptroller has set a goal of processing all of the approximately 10,000 protective refund claims by the end of 2015. It is unclear, however, how long it will take the Comptroller to process all of the refund claims currently being filed by taxpayers that, rather than filing protective claims for 2012 and 2013, waited until the decision in Wynne was issued in May of 2015. The Comptroller is receiving these types of refund claims on a daily basis.
The Comptroller estimates that approximately 55,000 Maryland residents are due a refund. Even assuming that a significant portion of those taxpayers will not file refund claims because their refunds are of an insignificant amount, the additional claims could easily number in the tens of thousands. The Comptroller is processing the refund claims in the order in which they were received, so taxpayers that filed separate protective claims (based on the applicable year’s statute of limitations) will be receiving separate refund checks for each year at different times. The Comptroller fully expects the processing of the more recently filed refund claims to overlap with the 2015 filing season, which is expected to delay the completion of processing all of the Wynne refund claims.
Breaking News: The U.S. Supreme Court has ruled in favor of the taxpayer in Comptroller v. Wynne, an important case for Maryland residents paying taxes to other states. The Court issued its 5-4 decision on May 18, 2015, holding that the state’s failure to allow resident individuals a credit for the county income tax against taxes paid to other states on pass-through income from an S Corporation is unconstitutional because it is inherently discriminatory and operates a tariff. The decision by the Court means that many Maryland residents earning income from other states can receive income tax refunds as a result of being able to claim a larger credit for taxes paid on their Maryland income tax returns.
The decision by the Court upheld the ruling issued by the Maryland Court of Appeals in May of 2013. Specifically, the U.S. Supreme Court concluded that Maryland’s tax scheme violated the dormant Commerce Clause’s internal consistency test because if all states adopted Maryland’s rule, interstate commerce would be taxed at a higher rate than intrastate commerce. The Court reasoned that the lack of a credit for the county portion of Maryland’s income tax subjected income earned from interstate commerce to a double tax burden to which intrastate commerce is not exposed.
The Court rejected assertions that prior Supreme Court decisions were not applicable because those cases involved corporate gross receipts taxes as opposed to net income taxes imposed on individuals. The Court saw no reason why there should be a distinction between gross receipts and net income taxes, reasoning that the focal point should be on the economic impact of a particular tax. The Court also rejected the argument that the dormant Commerce Clause should offer less protection to individuals because they can remedy any discrimination through their right to vote, calling the notion both “fanciful” and “farfetched.”
It’s likely that the Comptroller will speak out on the decision, and hopefully provide taxpayers with information on the timing and manner of issuing taxpayers refunds. Based on the favorable taxpayer decision issue by the Court, there may also be a challenge to Maryland’s recently-passed legislation that reduces the interest rate on Wynne-based refund claims. Taxpayers that have not filed protective claims should contact their tax advisor about filing refund claims related to the Wynne decision for all open tax years.
If you have any questions regarding the Court’s decision or filing a refund claim in Maryland please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
Related: To read previous reporting on the history of this case, click here.
Maryland taxpayers with outstanding liabilities will have a chance to come clean through a tax amnesty program that will take place later this year. On April 14, 2015, Governor Hogan signed legislation that requires the Comptroller to administer a tax amnesty program from September 1, 2015 to October 30, 2015. The program allows for the waiver of civil penalties and one-half of any outstanding interest due to the nonreporting, underreporting, and/or nonpayment of Maryland state and local income tax, withholding taxes, sales and use taxes, and admissions and amusement taxes.
Maryland’s 2015 amnesty program applies to tax returns or payments due prior to January 1, 2015. To participate in the amnesty program, a taxpayer must do one of the following during the amnesty period:
The third option will allow taxpayers to negotiate a payment plan with the Comptroller as long as full payment is made by the end of 2016. It’s important to note that a taxpayer that enters into an agreement with the Comptroller is still required to file the outstanding tax return(s) during the amnesty period. Further, the waiver of one-half of the interest for taxpayers entering into such an agreement does not apply to interest accruing for periods after October 31, 2015. Finally, taxpayers that participated in a prior Maryland amnesty program between 1999 and 2014 or the 2004 settlement period program are ineligible for the 2015 amnesty program.
Maryland last administered a tax amnesty program in 2009. The 2009 program generated $38.9 million, approximately $31 million of which was from individual income tax.
The Comptroller will likely administer the program similarly to the 2009 program, which means that taxpayers will be required to submit an amnesty application that is accompanied by the unfiled tax returns and/or payment of the tax and one-half of the interest. If a taxpayer is not paying the entire outstanding liability, the application should allow taxpayers to have an option to enter into a payment plan.
There are a few important things to think about when considering applying for the amnesty program. First, taxpayers that have an outstanding assessment or are currently under audit are eligible to participate in the program. Second, there is no penalty for not participating in the program. Other state tax amnesty programs often impose an amnesty penalty (in addition to other penalties) on tax liabilities paid after their program that were eligible for payment under the program. Third, the program does not explicitly allow for a limited look back period with respect to the returns that must be filed by a taxpayer. Thus, rather than participating in the amnesty program, taxpayers with unfiled returns for more than three prior years should consider participating in the Comptroller’s voluntary disclosure program. When participating in the voluntary disclosure program, in exchange for voluntarily paying the most recent three years of tax, the Comptroller typically agrees to not to assess tax for any period prior to such three-year period. This is an important consideration for individuals or businesses that have not filed back year returns because the Comptroller generally has the authority to issue assessments against non-filers indefinitely (i.e., there is no statute of limitations). The voluntary disclosure program also offers a waiver or penalty, but all the interest must be paid.
Taxpayers that have significant outstanding Maryland tax liabilities can benefit from entering into the amnesty program. Whether the program is the best course of action, however, will vary for each individual taxpayer. Factors such as the expiration of the statute of limitations for a particular liability and whether the voluntary disclosure program is a better option should be considered before entering into the program.
If you have questions about paying an outstanding Maryland tax liability please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6298.