Maryland Legislature Enacts Single Sales Factor Phase-In

On April 24, 2018, Maryland Governor Larry Hogan signed legislation HB1794 and SB1090 that will phase-in a single sales factor apportionment formula to be used by multistate corporations when calculating the portion of business income taxable in Maryland. The phase-in of the single sales factor will begin in the tax year 2018 and will be fully implemented in the tax year 2022. Under prior law, most corporations used a three-factor formula consisting of property, payroll, and a double-weighted sales factor. The new legislation, which came as a recommendation from the Maryland Economic Development and Business Climate Commission, will generally reduce the income tax liabilities for corporations headquartered in Maryland or that have a significant amount of property and payroll in the state.

Maryland’s adoption of a single sales factor is consistent with the trend across the country, with approximately 20 states now utilizing an apportionment formula. The District of Columbia adopted single sales factor in 2015. Other states that recently adopted a single sales factor include Pennsylvania, New York, and New Jersey.

The state’s decision to phase-in single sales factor apportionment over a number of years, as opposed to making the change immediately, is not uncommon. The sales factor will make up a larger overall portion of the apportionment factor in each year of the four-year phase-in period. For taxable years beginning after December 31, 2017, and before January 1, 2019, the apportionment formula will be calculated with the numerator of the fraction being the sum of the property factor, payroll factor, and three times the sales factor. The resulting numerator will be divided by a denominator of five. For taxable years beginning after December 31, 2021, the single sales factor will be fully phased-in, and the property and payroll factor will no longer be included in the formula.

There is an exception to the use of the single sales factor apportionment formula for “worldwide headquartered companies.” A “worldwide headquartered company” is a corporation included in a group of corporations including a parent corporation that:

1. Filed a Form 10-Q with the SEC for the quarterly period ending June 30, 2017
2. Has its principal executive office in Maryland
3. Employs at least 500 full-time employees at the parent corporation’s principal executive office in Maryland

Taxpayers meeting this definition can elect each year whether to use the single sales factor formula or the 3-factor apportionment formula provided for under the prior law

Right now it is unclear whether the single sales factor provision will also apply to pass-through entities, as the legislation is enacted into the corporate income tax law. Currently, the Comptroller’s regulations pertaining to how pass-through entities apportion their income cross-references the corporate income tax regulations. This suggests that Maryland generally prefers corporations and pass-through entities to be subject to the same apportionment rules. However, since the regulation that the pass-through entity rules cross-reference includes the three-factor double-weighted sales apportionment formula, the Comptroller will likely need to make a change to its current regulations in order to give taxpayer’s clear guidance.

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