Maryland to Phase in Single Sales Factor Apportionment Formula for Most Multistate Corporate Taxpayers
SynopsisMaryland 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.
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.
Subject matter expertise
CPA, JD, Managing Partner - Tax
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