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05/07/2018

Maryland to Phase in Single Sales Factor Apportionment Formula for Most Multistate Corporate Taxpayers

    Synopsis

    Maryland Governor Larry Hogan recently signed legislation that phases in a single sales factor income apportionment formula for most multistate corporate taxpayers, effective for tax years beginning after December 31, 2017. The legislation permits any corporation that qualifies as a “worldwide headquartered company” to use the existing three-factor formula instead of the new single-sales factor formula. 

    Issue

    By law, Maryland requires most multistate corporations to use a three-factor formula for allocating a certain percentage of their income to Maryland for state income tax purposes, consisting of property, payroll and a double-weighted sales factor. The new legislation provides a four-year phase-in period of the new single-sales factor apportionment formula.  For most multistate corporations, the single-sales factor formula will be phased-in as follows:

    • For tax years beginning in 2018, the apportionment formula will be property, payroll, the sales factor multiplied by three, and a denominator of five.
    • For tax years beginning in 2019, the apportionment formula will be property, payroll, the sales factor multiplied by four, and a denominator of six.
    • For tax years beginning in 2020, the apportionment formula will be property, payroll, the sales factor multiplied by five, and a denominator of seven.
    • For tax years beginning in 2021, the apportionment formula will be property, payroll, the sales factor multiplied by six, and a denominator of eight.
    • For tax years beginning in 2022 and thereafter, the apportionment formula will be a single-sales factor. 

    Election for worldwide headquartered companies

    The new legislation will permit any taxpayer that qualifies as a “worldwide headquartered company” to elect-out of the single sales factor and use the existing three-factor formula.  For this purpose, a “worldwide headquartered company” is a corporation included in a group of corporations that includes a parent corporation, that:

    • Filed Form 10-Q with the Securities and Exchange Commission for the quarterly period ending June 30, 2017.
    • Has its principal executive office in Maryland?
    • Always employs between July 1, 2017 and June 30, 2020, at least 500 full-time employees at the parent corporations’ principal executive office in Maryland.

    The election by such a company to use the three-factor formula instead of the single sales factor is to be made annually. 

    What does CohnReznick think?

    The single sales factor provision enacted by the legislation addresses corporate income tax apportionment but is silent with respect to pass-through entities.  Even though Maryland regulations state that Maryland pass-through entities use the same apportionment provisions as provided for corporations.  Specific regulatory clarification on whether the new single sales factor does or does not apply to pass-through entities has not yet come from the Comptroller of Maryland.

    Contact

    For more information, please contact Henry Chiwaya, Director, State and Local Tax Services, at Henry.Chiwaya@CohnReznick.com or 301-280-1810.

    Subject matter expertise

    • Patrick Duffany headshot
      Contact Patrick Patrick+Duffany Patrick.Duffany@CohnReznick.com
      Patrick Duffany

      CPA, JD, Managing Partner - Tax

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    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.