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Analysis

Enacted Maryland law phases in single sales factor apportionment formula

This tax alert summarizes the changes provided by S.B. 1090 and provides some taxpayer considerations.

Overview

On April 24, 2018, Governor Hogan signed Senate Bill 1090 (S.B. 1090),1 which includes the following modifications to Maryland law applicable to all taxable years beginning after December 31, 2017:

  • A five-year phase-in of a single sales factor apportionment formula
  • A three-factor apportionment election for a worldwide headquartered company

Five-year phase-in of a single sales factor apportionment formula starting in tax year 2018

Prior to S.B. 1090, Maryland corporate taxpayers were required to use a three-factor double-weighted sales formula to apportion income, with eligible “manufacturing corporations” permitted to elect a single sales factor formula.

Effective for taxable years beginning after December 31, 2017, S.B. 1090 phases in a single sales factor formula over five years, as follows:

  • For the taxable year 2018, application of a three-factor apportionment fraction where the numerator consists of the property, payroll, and three times the sales factor; and the denominator is five;
  • For the taxable year 2019, application of a three-factor apportionment fraction where the numerator consists of the property, payroll, and four times the sales factor; and the denominator is six;
  • For the taxable year 2020, application of a three-factor apportionment fraction where the numerator consists of the property, payroll, and five times the sales factor; and the denominator is seven;
  • For the taxable year 2021, application of a three-factor apportionment fraction where the numerator consists of the property, payroll, and six times the sales factor; and the denominator is eight; and
  • For taxable years beginning after December 31, 2021, application of a 100 percent single sales factor apportionment formula.2
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Three-factor formula election for a worldwide headquartered company

Under S.B. 1090, all corporations will be subject to the phased-in single sales factor formula. However, a “worldwide headquartered company” that filed a federal corporate income tax return for the taxable year may elect to calculate its Maryland state taxable income using a three-factor apportionment fraction, where the numerator consists of the property, payroll, and two times the sales factor; and the denominator is four.3

The new law defines a “worldwide headquartered company” as a corporation included in a group of corporations, including a parent corporation, that:

  • Filed a Form 10-Q with the Securities and Exchange Commission for the quarterly period ending June 30, 2017
  • Has its principal executive office in Maryland
  • Employs at all times between July 1, 2017, and June 30, 2020, at least 500 full-time employees at the parent corporation’s principal executive office located within Maryland4
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Considerations

Taxpayers, including corporations, eligible worldwide headquartered companies, and pass-through entities should consult with their tax advisers regarding the impact of S.B. 1090 on their Maryland state taxable income. Potential implications may include:

  • Changes to quarterly estimated payments for the taxable year 2018 due to the change in the apportionment formula effective for the taxable year 2018
  • ASC 740 analysis of the effect of the apportionment formula change beginning in the taxable year 2018
  • Eligibility for worldwide headquartered company characterization, as well as the impact of electing to use the three-factor apportionment formula instead of the phased-in single sales factor formula
  • Impact on pass-through entities subject to mandatory non-resident withholding or otherwise electing to file Maryland composite returns. (Currently, the rules governing nonresident withholding and composite returns for pass-through entities require pass-through entities to use an apportionment formula identical to the apportionment formula used by corporations.)5
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Contacts

If you have questions regarding S.B. 1090 or other Maryland tax matters, please contact any of the following Deloitte Tax professionals:

Scott Frishman, principal, Deloitte Tax LLP, McLean, VA, +1 412 287 7979

Joseph Carr, managing director, Deloitte Tax LLP, McLean VA, +1 703 283 8190

James McNiff, senior manager, Deloitte Tax LLP, McLean, VA, +1 703 251 1147

Multistate Tax alert archive

The Multistate Tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

View the list of archived Multistate Tax alerts.

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References

1 S.B. 1090, 2018 Legislative Session (2018). A copy of the adopted law is accessible here.
2 S.B. 1090, 2018 Legislative Session, amending Md. Tax-General Code Ann. §10-402(c).
3 S.B. 1090, 2018 Legislative Session, amending Md. Tax-General Code Ann. §10-402(c).
4 S.B. 1090, 2018 Legislative Session, amending Md. Tax-General Code Ann. §10-402(a).
5 See Code of Maryland Regulations 03.04.07.02 (2018).

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