Part B
Taxes

Property Taxes

Truth in Taxation - Real Property Assessment

All real and personal property is valued for purposes of property taxation at full cash value. However, the law also provides that tax rates are only applied to a percentage of property value, which is termed the "assessment." Property assessments are the following percentages of full cash value:

• 100% - personal property and public utility operating real property;

• 50% - use value property (agricultural, marshland, woodland, etc.); and

• 40% - all other property.

Counties are required to impose one tax rate that is applicable to all property, both real and personal. Therefore, under the current system, differing levels of tax burden are imposed through the differing assessment levels.

As noted above, State and local tax rates are applied to most real property assessments that are equal to 40 percent of value. The tax rates are therefore 2.5 times what they would be if applied to assessments that equal the full value of the property. This has created confusion when State and local property tax rates in Maryland are compared to tax rates in other states. Senate Bill 626 (passed) addresses this problem by changing the method of assessing real property from 40 percent of value to full value and requiring a simultaneous reduction in property tax rates so that the change remains revenue neutral.

In addition to changing the assessment of real property to full value assessment, Senate Bill 626 makes numerous adjustments to provisions throughout the Annotated Code of Maryland relating to State aid, debt limitations, and other provisions that reference the tax assessment of property. The Department of Assessments and Taxation is also directed to report to the General Assembly by December 1, 2000, regarding any further amendments to the law necessary to correct any provisions rendered inaccurate or obsolete as a result of the change to full value assessment for real property.

The Department of Assessments and Taxation is required to include a statement regarding this change in assessment notices issued for tax year 2000, and local governments are required to include similar statements in each real property tax bill beginning in tax year 2000, and in the constant yield tax rate notice for tax year 2001. The department is also required to adopt regulations adjusting the valuation of use value property so that the change in assessments is revenue neutral.

Property Tax Administration

Real Property - Recordation - Lien for Unpaid Personal Property Taxes

Historically, in the State, liens for unpaid real property taxes have been granted priority above other liens, including those held by mortgage lenders. Lenders can protect themselves from the risk posed by granting priority to these liens by requiring the establishment of a tax escrow for real property taxes. In recent years, a controversy has developed as some local jurisdictions have interpreted the law to grant this same priority to tax liens on real property for unpaid personal property tax owed by the owner of the real property. This interpretation has created a problem for lenders because they have no way of controlling for the risk of a borrower not paying personal property taxes, particularly if the personal property was purchased after the real property was underwritten. In order to eliminate this risk, Senate Bill 12/House Bill 157 (both passed) establish that in the event of a liquidation sale or a repossession of property by a creditor, any liens for unpaid personal property taxes are extinguished, unless: (1) a personal property tax lien was recorded prior to recording the mortgage; or (2) the unpaid personal property taxes are owed by the transferee or subsequent owner of the land.

Property Tax Credits - Construction

In the past, the passage of an act granting or authorizing the granting of a property tax credit for a particular entity or type of entity has been cited as evidence that the legislature did not intend the entity or type of entity to be eligible for a property tax exemption. Senate Bill 331/House Bill 821 (both passed) provide that a law that grants a tax credit may not be construed to affect the eligibility of any entity for a property tax exemption.

Homeowner's Property Tax Credit

Residency Requirements: House Bill 589 (passed) changes the current homeowners' tax credit requirement that a home purchaser occupy the residence for six consecutive months to allow the home purchaser to be eligible if the purchaser occupies the residence for the remainder of the taxable year for which the property tax credit is sought.

Home Purchaser Application: Currently, a home purchaser may not apply for the homeowners' tax credit until settlement on the dwelling, and if a tax credit is granted, the Comptroller pays the homeowner the amount of credit. House Bill 590 (passed) allows a home purchaser to apply for a homeowners' tax credit after the execution of a contract of sale on a property and provides that the final tax liability due at settlement will be adjusted to reflect any credit certified by the Department of Assessments and Taxation.

Property Tax Relief

Tax Credits

Neighborhood Preservation and Stabilization Tax Credits: Chapter 599 of 1996 created a demonstration project for neighborhood preservation and stabilization in Baltimore City and Baltimore County. The 1996 legislation authorized Baltimore City and Baltimore County to grant property tax credits for ten years for owner-occupied residential property purchased from July 1, 1996 to June 30, 1999, in geographic areas designated by the local jurisdictions for participation in the project. Chapter 599 of 1996 also provided for matching State income tax credits for property owners who received the local property tax credits. Chapter 319 of 1999 extended the qualifying period by two years, to June 30, 2001, and expanded the geographic areas that could be designated to participate in the tax credit. During the 2000 session, bills were passed to further expand and extend the existing demonstration project in Baltimore City and Baltimore County and to authorize similar neighborhood preservation tax credits in Montgomery County and Prince George's County.

Senate Bill 348 (passed) extends the life of the Neighborhood Preservation and Stabilization demonstration project for Baltimore City and Baltimore County for one additional year, through June 30, 2002, and authorizes the inclusion of another neighborhood in Baltimore County for participation in the project.

House Bill 918 (passed) authorizes Montgomery County to establish a Neighborhood Preservation and Stabilization demonstration project for up to 1,500 dwelling units, purchased between July 1, 2000, and June 30, 2002, in specific geographic areas designated by the County Executive for inclusion in the project. The geographic areas designated by the County Executive must contain at least 50 single-family homes. The property tax credit equals 40 percent of the county property tax due for each of the first five years after purchase, and declines by 5 percent annually until the tenth year. After the tenth year, the credit expires. House Bill 918 also provides for a matching State income tax credit equal to the property tax credit granted.

House Bill 1009 (passed) authorizes Prince George's County to establish a Neighborhood Preservation and Stabilization demonstration project for owner-occupied, residential real property purchased in designated neighborhoods from July 1, 2000, through June 30, 2002, in two geographic areas designated by the county. The two geographic areas must be located within at least two of the following: a priority funding area, a revitalization tax credit district, as defined under the Prince George's County Code, and/or an enterprise zone. The designated areas may contain up to 2,500 single-family dwellings in the aggregate. The property tax credit equals 40 percent of the county property tax due for each of the first five years after purchase and declines by 5 percent annually until the tenth year. After the tenth year, the credit expires.

House Bill 1009 also provides for a matching State income tax credit equal to the property tax credit granted.

New or Expanded Businesses: Senate Bill 86/House Bill 144 (both passed) alter the requirements of the tax credits for businesses that create new jobs in counties with populations of less than 30,000. In these counties, under Senate Bill 86/ House Bill 144 the minimum job creation requirement to be eligible for the credits is reduced from 25 to 10.

Rehabilitated Property: Senate Bill 507/House Bill 830 (both passed) authorize a county or municipal corporation to establish a property tax credit for real property that has been rehabilitated under regulations adopted by the local government. The amount and duration of the credit may be established by the local government but may not exceed the amount of the increase in property tax attributable to an increase in the assessment from before the rehabilitation and also cannot exceed ten years.

Dental Equipment in Underserved Areas: Senate Bill 874/House Bill 1169 (both passed) authorize a county or municipal corporation to grant a property tax credit against the county or municipal property tax on personal property used in practicing dentistry in a geographic area designated by the Secretary of the Department of Health and Mental Hygiene as being underserved by dentists.

Community Associations: House Bill 671 (passed) authorizes a county or municipal corporation to grant a property tax credit against the county or municipal property taxes imposed on personal property of community associations valued at $8,000 or less. The association must have been in existence at the beginning of the taxable year and be in good standing if incorporated in Maryland.

Local Property Taxes

Baltimore City

Newly Constructed and First Purchase Dwellings: House Bill 536 (passed) extends the June 30, 2000, termination date of the Baltimore City property tax credit program for newly constructed and first purchased dwellings until June 30, 2002. Baltimore City may grant a property tax credit against city property tax imposed on newly constructed dwellings or first purchased dwellings owned by qualified owners. The credit is 50 percent for the first taxable year and decreases 10 percent each year until it expires after the fifth year.

Tax Sales - Abandoned Property: Under current law applicable to Baltimore City, property for which taxes are in arrears may be sold at a tax sale for an amount that is less than the taxes owed, but a minimum bid is not required to be established.

Senate Bill 719/House Bill 743 (both passed) provide that abandoned property that is either a vacant lot or improved property that is unfit for habitation may be sold at a tax sale for less than the total amount of the taxes due, with the tax collector required to set a minimum bid for the property. If the property is sold for less than the amount of the taxes owed, the purchaser is required to pay the full amount of the bid and the expenses incurred from the sale. This payment must be made by the day after the sale. Any balance that remains after a sale is no longer a lien on the property when: (1) a judgment is entered foreclosing the owner's right of redemption; (2) the deed is recorded; and (3) all liens accruing subsequent to the tax sale are paid in full. Under the bills, certificate of sale is void and reverts back to the city unless foreclosure proceedings are brought by the purchaser within three months from the date of the certificate, with certain exceptions.

Release of Liens for Unpaid Real Property Taxes: Senate Bill 535/ House Bill 744 (both passed) clarify the circumstances under which Baltimore City may release a lien for unpaid city real property taxes on certain vacant property. The bills provide that if property with unpaid property taxes is donated to a nonprofit organization, the transferor must pay to the city an amount equal to any income tax benefit received from a deduction for a charitable contribution. If the transferor pays this amount to the city, the transferor's property tax debt is reduced by an amount equal to the fair market value of the property.

Caroline County

Senate Bill 628/House Bill 618 (both passed) authorize Caroline County to grant a property tax credit on real property owned by Caroline County Habitat for Humanity, Inc. that is used exclusively for the purpose of rehabilitation and transfer to a private owner.

Cecil County

Currently, municipal corporations in Cecil County are authorized to charge an interest rate for overdue property taxes not to exceed 2/3 percent per month. Cecil County is authorized to charge an interest rate not to exceed 1 percent per month.

Senate Bill 640 (passed) authorizes municipal corporations in Cecil County to set by law the interest rate for overdue property taxes not to exceed 1 percent per month. This change will allow Cecil County to bill property taxes on behalf of all its municipalities. Senate Bill 640 also requires Cecil County at the request of a municipal corporation to collect reasonable fees and charges imposed by the municipal corporation.

Charles County

House Bill 567 (passed) authorizes Charles County to grant a county property tax credit to new businesses locating in the county for machinery and equipment used in manufacturing products for sale or for new facilities in the generation of electricity. The county and municipal corporations may also grant a local property tax credit on any property owned by a new or expanding business that creates ten or more full-time jobs in an industry targeted by the Charles County Economic Development Commission. The tax credit may not be granted for more than ten years.

Dorchester County

Under current law, Dorchester County may grant a property tax credit for agricultural land that is subject to or developing a nutrient management plan, or forest land that is subject to a forest management plan or similar agreement.

Senate Bill 837/House Bill 1367 (both passed) expand this authorization to allow Dorchester County to grant a county property tax credit on agricultural land that is located in an agricultural preservation district or that is subject to an agricultural land preservation easement or similar easement.

Garrett County

House Bill 808 (passed) authorizes Garrett County to grant a property tax credit against county property taxes for agricultural land located in an agricultural land preservation district. Under the bill, if the property owner subsequently withdraws the property from the preservation district, the county is authorized to recoup from the owner all taxes that would have been paid without the credit and interest at a rate set by the county.

Prince George's County

Senate Bill 98 (passed) authorizes Prince George's County to grant a property tax credit against the county property tax or special district tax for property that is owned by the Lake Arbor Foundation, Inc.

Somerset County

House Bill 315 (passed) allows Somerset County to grant a property tax credit against county property tax on real property owned by the Crisfield Heritage Foundation, Inc. The bill also repeals existing authority relating to property tax credits for the Crisfield Chamber of Commerce, which does not own real property in Somerset County, and the J. Millard Tawes Foundation, which changed its name on October 7, 1999, to the Crisfield Heritage Foundation, Inc.

Talbot County

Senate Bill 474 /House Bill 346 (passed) authorize Talbot County or a municipal corporation in Talbot County to grant a property tax credit against the local corporation property tax on personal property. The county or municipal corporation may, by law, set the amount, terms, scope, and duration of the credit, as well as designate subclasses of personal property to which a credit applies.

Washington County

House Bill 1075 (passed) authorizes the governing body of Washington County or a municipal corporation in Washington County to grant a property tax credit for property owned by the Rohrersville Cornet Band of Washington County.

Wicomico County

House Bill 485 (passed) authorizes Wicomico County or a municipal corporation in Wicomico County to grant a property tax credit for property owned by the Salisbury Area Chamber of Commerce, Inc.

Worcester County

House Bill 196 (passed) authorizes Worcester County or a municipal corporation in Worcester County to grant a property tax credit for property owned by the Pocomoke City Chamber of Commerce. House Bill 197 (passed) authorizes Worcester County to grant a property tax credit for property owned by the Ocean City Chamber of Commerce.

Income Tax

Income Tax Acceleration

Calendar 2000 is the third year of a five-year phased-in income tax reduction enacted by the General Assembly in 1997 and accelerated by legislation enacted in 1998. Under the current law, the top marginal income tax rate, formerly 5 percent, has been reduced to 4.85 percent for tax year 2000, and will drop to 4.8 percent for tax year 2001 and to 4.75 percent for tax years after 2001. The amount allowed to be deducted for personal exemptions, formerly $1,200, has been increased to $1,850 for tax year 2000 and will increase to $2,100 for tax year 2001 and to $2,400 for tax years after 2001.

Although further acceleration of the income tax reduction was the subject of considerable discussion prior to the session in light of the sizable budget surplus projected, income tax reduction did not become a major theme of the 2000 session. However, several bills were introduced that would have further accelerated the income tax reduction. Senate Bill 227/House Bill 12 (both failed) would have accelerated the income tax reduction by one year, at an estimated cost to State general fund revenues of $144.8 million in fiscal 2001 and $51.9 million in fiscal 2002. Senate Bill 228 (failed) would have accelerated the income tax cut by two years, at an estimated cost of $247.2 million in fiscal 2001 and $51.9 million in fiscal 2002.

Maryland Research and Development Tax Credit

Senate Bill 309/House Bill 14 (both passed) establish a research and development (R&D) income tax credit for Maryland that is modeled somewhat after the

federal research and development tax credit program. The new tax credit has two parts: (1) a nonincremental credit based on a taxpayer's R&D expenses up to the "base" amount of Maryland R&D expenses; and (2) a credit based on "incremental" spending, or spending above the base amount. The nonincremental credit is 3 percent of qualifying R&D expenditures while the incremental income tax credit is 10 percent of qualifying expenditures. The maximum allowed for each of the credits for all taxpayers is $3 million annually, for a total of $6 million. The bills establish a process for applying for the credits and a methodology for proportionally reducing credits if the application amounts exceed the annual cap. A 15-year carryforward of any unused credit amount is allowed. The bills require the Department of Business and Economic Development (DBED) and the Comptroller to jointly conduct an evaluation and report to the General Assembly by December 15, 2005, on the program's success in increasing the level of investment in research and development activities and attracting and retaining R&D businesses in Maryland. Under the bills, the credits are generally applicable to tax year 2000 through 2004.

Beginning in fiscal 2002, the Maryland R&D tax credits will be expected to reduce State revenues by no more than $6 million per year due to the statutory cap during the five-year period the credit is in effect. The breakdown of the loss for general and special fund revenues will depend on the number of corporate income tax credits taken, which affects funding for the Transportation Trust Fund. Local revenues would also decrease, again depending on the number of corporate tax credits and the loss to the Transportation Trust Fund.

Refundable Earned Income Credit

Since 1987, Maryland's income tax law has provided an earned income credit (EIC) against the State income tax equal to 50 percent of the federal earned income credit. For federal income tax purposes, the earned income credit, which provides tax relief to low income wage earners, is "refundable" - if the amount of the federal credit exceeds an individual's income tax liability, the individual may receive a refund. Since its enactment in 1987 until 1998, the State EIC had been nonrefundable. In 1998, the General Assembly enacted legislation to include a refundable component in the Maryland EIC for qualifying individuals with dependents (Chapter 5 of the Acts of 1998).

Under the refundable EIC, the State provides a refund to individuals whose credit is greater than the individual's State income tax liability. For tax years 1998 and 1999, the State's refundable EIC was based on 10 percent of the federal credit. Under current law, the refundable credit was scheduled to increase to 12.5 percent of the federal credit in tax year 2000 and to 15 percent of the federal credit beginning in tax year 2001.

Senate Bill 240 (passed) accelerates by one year the full phase in of the 15 percent refundable earned income tax credit. Although the nonrefundable EIC is applicable to county, as well as State income taxes, the 1997 legislation establishing the refundable EIC made it applicable only to the State income tax. The bill also authorizes the counties and Baltimore City to make the county EIC refundable. The bill specifies that this authorization is not intended to affect a local jurisdiction's authority to establish a program similar to Montgomery County's Working Families Income Supplement Program, which was implemented in 1999 and is the equivalent of a county refundable EIC.

As a result of this acceleration, general funds will decrease by an estimated $13 million in fiscal 2001. This is a one-time revenue loss because the full 15 percent will begin in tax year 2001 regardless.

Maryland College Investment Plan

Senate Bill 140/House Bill 11 (both passed) establish the Maryland College Investment Plan as part of the Maryland Higher Education Investment Program. The bills provide State income tax benefits for those participating in the new program similar to the tax benefits already available to those participating in the Maryland Prepaid College Trust. The bills allow taxpayers a subtraction modification of up to $2,500 for amounts contributed to an investment account under the Maryland College Investment Plan. Contributions in excess of $2,500 for any taxable year may be carried forward and used as a subtraction for up to 10 succeeding tax years. A subtraction modification is also allowed under the bills for distributions to a qualified designated beneficiary under an investment account, to the extent the distributions are included in federal adjusted gross income. The bills also require that any refunds from an investment account or distributions that are not used for qualified higher education expenses of the qualified designated beneficiary must be added back to determine Maryland taxable income.

For a complete discussion of Senate Bill 140/House Bill 11 see the subpart Higher Education of Part L-Education within this 90 Day Report.

Disparity Grants

Until tax year 1999, local taxes were calculated as a percentage of the State income tax. In order to hold the counties harmless from the State income tax reduction enacted in 1997, taxpayers had to calculate State taxes twice, resulting in a form that was overly complicated. In an effort to simplify the calculation of the county income tax, Chapter 493 of the Acts of 1999 changed the tax calculation so that the local income tax was calculated based on Maryland taxable income rather than the State income tax, resulting in new local income tax rates to be applied to Maryland taxable income.

Senate Bill 551/House Bill 945 (both passed) correct the calculation of the county income disparity grant to reflect the current method of calculating local income taxes which took effect in tax year 1999.

Credit for Child and Dependent Care Expenses

In 1999, the General Assembly enacted Chapter 584, establishing a State income tax credit for child and dependent care expenses modeled after the federal child and dependent care credit. As enacted under Chapter 584 of the Acts of 1999, the credit allowed is up to 25 percent of the federal credit claimed by the individual for that taxable year, but not more than the taxpayer's State income tax for the taxable year. The credit is available to qualified individuals whose federal adjusted gross income is at or below $40,000 or $20,000 if married filing separately; the full credit is available to those with federal adjusted gross income of $30,000 or less ($15,000 or less if married filing separately), and it phases out for incomes between $30,000 and $40,000 ($15,000 and $20,000 if married filing separate returns). Senate Bill 335 (passed) increases the State income tax credit for child and dependent care expenses from 25 percent to 32.5 percent of the federal child and dependent care credit and increases from $40,000 to $50,000 the maximum income eligibility for the credit (from $20,000 to $25,000 for a married individual filing a separate return). As a result, general fund revenues will decrease by an estimated $6 million annually.

Taxation of Retirement Income

For several years, various proposals have been introduced to expand the existing "pension exclusion" under the Maryland income tax. Senate Bill 401 (passed) defines "employee retirement system" to clarify the types of retirement income that can be included for purposes of calculating the existing pension exclusion. Under the bill, an "employee retirement system" for purposes of the pension exclusion is a plan that is established and maintained by an employer for the benefit of its employees and is qualified under § 401(a) or 457(b) of the Internal Revenue Code. However, "employee retirement system" does not include an I.R.A., a Roth I.R.A., a rollover I.R.A., a simplified employee pension under § 408(k) of the Internal Revenue Code, or an ineligible deferral compensation plan under § 457(f) of the Internal Revenue Code.

Several bills were again introduced during the 2000 session to expand the exclusion. Senate Bill 285, House Bill 465, House Bill 475, House Bill 629 and House Bill 630 (all failed) would have expanded the types of income that could be excluded from retirement income by taxpayers when calculating their Maryland income tax.

Long-Term Care Insurance

Senate Bill 171 (passed) creates a credit against the individual income tax for 100 percent of the premiums paid for long-term care insurance by an individual for coverage of the individual or the individual's spouse, parent, stepparent, child, or stepchild. The credit may not exceed $500 for each insured for whom an individual pays the premiums and may not be claimed with respect to an insured individual if the insured individual was covered by long-term care insurance at any time before July 1, 2000, or if the credit has been claimed with respect to that insured individual by any taxpayer for any prior taxable year. This credit does not affect the tax treatment of any deduction allowed under federal law for long-term care premiums.

The bill also requires the Comptroller, beginning on December 1, 2005, and each year thereafter, to report to the Governor and the General Assembly on the credit. The report must include: (1) the number of individuals who have claimed the credit, the amount allowed as credits, and the additional number of individuals covered by long-term care insurance as a result of the credit; and (2) the savings under the State's medical assistance program as a result of additional individuals being covered by long-term care insurance as a result of the credit.

It is estimated that general funds would decline by approximately $3 million annually beginning in fiscal 2001 as a result of the tax credit under Senate Bill 171.

Adoption Expenses

Senate Bill 316 (passed) increases the maximum amount allowed as a subtraction modification under the income tax for reasonable and necessary adoption fees, court costs, attorney fees, and other expenses incurred by adoptive parents from $3,000 to $6,000 for a child determined to be a child with a special need and from $2,000 to $5,000 for a child without a special need. In order to claim the increased subtraction modification, the child must be a Maryland resident and the adoption must be made through a private, not for profit, licensed adoption agency or a public child welfare agency.

Under the bill, adoptive parents who adopt children who are not Maryland residents at the time of adoption may claim the current subtraction modification of $3,000 for a child determined to be a child with a special need and $2,000 for a child without a special need.

Other Income Tax Bills

Senate Bill 670/House Bill 20 (both passed) provide for a variety of tax incentives in order to encourage the use of clean energy technologies, including an income tax credit for the production of electricity through the use of organic materials in addition to coal. See the discussion of Senate Bill 670/House Bill 20 under the subpart "Miscellaneous Taxes" within this part of The 90 Day Report.

House Bill 1103 (passed) allows an income tax subtraction modification for 100 percent of the expenses incurred by a taxpayer to purchase and install handrails in existing elevators in health care facilities or any other building in which at least 50 percent of the space is used for medical purposes.

House Bill 1303 (passed) reduces, over a period of four years, the duration of service required in Maryland volunteer fire, rescue, or emergency medical service organizations from 72 months to 36 months in order for an individual to be eligible for the subtraction modification under the Maryland income tax.

State income tax credits are provided in connection with Senate Bill 86/House Bill 144 (both passed) which alter the requirements of the tax credits for businesses that create new jobs. See the discussion of these bills under the subpart "Property Taxes" within this part of The 90 Day Report.

State income tax credits are provided in connection with Senate Bill 348 (passed), House Bill 918 (passed),and House Bill 1009 (passed) which expand the Neighborhood Preservation and Stabilization demonstration project. See the discussion of these bills under the subpart Property Taxes within this part of The 90 Day Report.

Sales Tax

Tax-Free Week

Several bills were introduced in the 2000 session to temporarily eliminate the sales and use tax on clothing. Senate Bill 103/House Bill 170 (both passed) exempt from the sales and use tax the sale of clothing or footwear (excluding accessories) during the week of August 10 through August 16, 2001, if the taxable price of the item is less than $100. Other states, including Texas, New York, and Florida, have implemented tax-free weeks. Typically, these tax-free weeks have been provided immediately prior to the school year, to provide a benefit to families shopping for back-to-school clothes. Sales of clothing and footwear eligible for the exemption during the August 2001 tax-free week will result in an estimated general fund revenue loss of $6.7 million in fiscal 2002.

Dedicated Revenue to Mass Transit Account

In order to create a dedicated source of mass transit funding in addition to current funding from the Transportation Trust Fund (TTF), 20 percent of sales and use tax revenue would have been dedicated to a newly-created Mass Transit Account of the TTF under Senate Bill 286 /House Bill 1 (both failed). The revenue dedication would have been phased in, so that in fiscal 2001, 2 percent of the sales and use tax revenue would have been dedicated to the Mass Transit Account. This would increase 2 percent each year until fully phased in (20 percent) in fiscal 2010. For a more detailed discussion of these bills, see the subpart Transportation, Part G - Transportation and Motor Vehicles of this 90 Day Report.

Tobacco Cessation Products

The Comptroller's Office has deemed that nicotine patches, nicotine gum, and other products intended for use as an aid in tobacco use cessation and approved by the United States Food and Drug Administration for that purpose are medicines and exempt from the sales and use tax. Despite the Comptroller's determination, some retailers have continued to charge the sales tax on tobacco cessation products. Senate Bill 137/House Bill 128 (both passed) clarify the exemption for sales and use tax purposes.

Remote Transactions

The State imposes a sales and use tax on the sale of most tangible personal property purchased outside the State, including items purchased through the Internet or an out-of-state mail order catalog. However, under the U.S. Supreme Court decisions in National Bellas Hess and Quill, a state or local government cannot constitutionally require businesses without a physical presence within its borders to collect sales or use taxes. Remote sellers (those businesses selling goods via the Internet (e-commerce), phone, and mail order catalogs) are therefore often protected from sales and use tax collection obligations. If the seller is not required to collect and remit the sales tax, then the buyer is legally required to pay the use tax. However, few if any, individual customers pay the applicable use tax. The Comptroller's Office advises that it collects less than $100,000 per year in use taxes from individual taxpayers, and that use tax compliance is greater among businesses, where the likelihood of audit is greater.

These issues have existed for several years within the context of sales and use taxes on phone and mail order sales. Recently, the exponential growth of the Internet and e-commerce has magnified the significance of this phenomenon. Recognizing that the world of e-commerce presents even more complications, Congress passed the Internet Tax Freedom Act (ITFA) in 1998 with the objective of developing a new tax system that satisfies both government revenue needs and business' desire for a simple, fair tax structure that does not stifle the Internet's growth. The Act's provisions include a three-year moratorium on imposing new taxes on Internet services, grandfathering all state taxes that were in effect prior to October 1, 1998, and creating a 19-member Advisory Commission on Electronic Commerce to study the issue and to make recommendations to Congress.

ITFA, however, does not supersede state laws that were in place prior to its implementation. Maryland's sales and use tax on sales of tangible goods is therefore not affected by ITFA, so purchases by Marylanders via the Internet are subject to the sales and use tax, even though collections, as noted above, are low.

Given the growth in e-commerce, the State is anticipated to lose significant sales and use tax revenues in the future if the status quo is maintained. This revenue loss is driven primarily by the migration of both individual and business customers from local purchasing, for which taxes are collected, to Internet purchasing, for which taxes are seldom collected. The Bureau of Revenue Estimates (BRE) of the Comptroller's Office estimates that the State will lose approximately $150 million annually in sales and use tax revenues by calendar 2003 and even greater amounts in the future.

To address the issue of e-commerce and potential multi-state solutions to the remote taxation issue, House Bill 1421 (passed) requires the Comptroller to enter into discussions with other states regarding the development of a multistate, voluntary, streamlined system for sales and use tax collection and administration. These discussions must focus on a system that: (1) will have the capability to determine whether a transaction is taxable or tax exempt, the appropriate tax rate applied to the transaction, and the total tax due on the transaction; and (2) will provide a method for collecting and remitting sales and use taxes to the State. The system may provide compensation for the costs of collecting and remitting sales and use taxes.

The bill allows the Comptroller to participate in a sales and use tax pilot project with other states and selected businesses to test means for simplifying sales and use tax administration and may enter into joint agreements for that purpose. Agreements to participate in the pilot program must establish provisions for the administration, imposition, and collection of sales and use taxes resulting in revenues paid that are the same as would be paid under State sales and use tax law. Parties to the agreements are excused from complying with the provisions of State sales and use tax law to the extent a different procedure is required by the agreements, except for confidentiality of taxpayer information. Any agreements authorized must terminate by December 31, 2001.

Under House Bill 1421, the Comptroller is to provide periodic reports to the Governor and the General Assembly on the progress of multistate discussions. By March 1, 2001, the Comptroller must report to the Governor, Legislative Policy Committee, and fiscal committees on the status of multistate discussions and, if a proposed system has been agreed upon by participating states, must also recommend whether the State should participate in the system.

Telecommunications Equipment

Several bills affecting State sales taxation of telecommunications equipment were introduced in the 2000 session.

Exemption for Digital Telecommunications Machinery and Equipment

The federal Telecommunications Act of 1996 adopted rules for the implementation of Digital Television (DTV) in the United States. All existing television stations are required to broadcast digital signals by a specified time. Four Baltimore television broadcasting stations are required to provide some on-air digital television by November 1, 1999. Of the remaining stations, six commercial stations are required to broadcast digital signals by May 2002, and the six Maryland Public Television (MPT) stations are required to simulcast digital television by May 2003. Senate Bill 701/ House Bill 794 (both passed) exempt from the sales and use tax digital telecommunications machinery or equipment that enables a television or radio station to originate and broadcast, or receive and broadcast, digital signals and that has been purchased to comply with the federal Act. The exemption applies to all sales from January 1, 2000, to January 1, 2008.

Industry sources estimate that the ten commercial television stations in Maryland are projected to spend $52 million over a six-year period on equipment and machinery in order to broadcast and receive digital signals, with the cost declining from $16 million in calendar 1999 to $4 million in calendar 2004. Each station expects to spend between $2 million and $8 million for new equipment purchases. Some of these expenditures took place prior to January 1, 2000, and are not subject to the exemption. If the industry's estimates reflect actual expenditures, the State will experience a reduction in sales and use tax revenues of $1.7 million over six fiscal years beginning in fiscal 2000.

Telecommunications Equipment

Senate Bill 161/House Bill 132 (both failed) would have exempted from the sales and use tax the sale to, or use by, telecommunications providers of any machinery or equipment, including computer software, if the equipment or machinery is related to the conduct of: (1) a telecommunications business; or (2) a business that offers or provides the use of the computer and telecommunications facilities, including equipment and operating software, that comprise the interconnected worldwide network of networks that employ the transmission control protocol/Internet protocol, or any predecessor or successor protocols to that protocol.

Film Production Activity

Tangible personal property or a taxable service that is used directly in connection with a "film production activity" becomes exempt from the sales and use tax under Senate Bill 192/House Bill 926 (both passed). The film producer or production company must apply to the Department of Business and Economic Development (DBED) for certification of eligibility for the exemption. The bill defines "film production activity" as the production or postproduction of film or video projects including feature films, television projects, commercials, corporate films, infomercials, music videos, or other projects for which the producer or production company will be compensated, and which are intended for nationwide distribution. Tangible personal property or a taxable service includes: (1) camera equipment and supplies; (2) film and tape; (3) lighting and stage equipment and supplies; (4) sound equipment and supplies; (5) recording equipment and supplies; (6) costumes and related material; (7) props and scenery and related material; (8) design supplies and equipment; (9) drafting supplies; (10) special effects supplies; (11) short-term vehicle rentals; and (12) fabrication, printing, or production of scripts, storyboards, costumes, wardrobes, props, scenery, or special effects.

Due to the sales tax exemption, general fund revenues could decrease by $708,800 in fiscal 2001. Future revenue losses will vary based upon the level of film production activity in the State. To the extent that additional films and video are produced in Maryland that would otherwise have been made out-of-state, these revenue losses could be offset somewhat by additional tax revenues generated from spending by the film crews.

Bottled Water

Bottled water for human consumption sold in containers of one gallon or more is exempt from the sales tax under Senate Bill 408 (passed). It is estimated that 50 million gallons of water are sold annually in Maryland in containers of one gallon or more. The price for water in these containers is estimated to range from 75 cents to $1, resulting in an estimated revenue loss of $2.2 million in fiscal 2002, with future years reflecting a 3 percent growth in sales each year.

Bulk Vending Machines

Merchandise sold through a "bulk vending machine" is exempt from the sales and use tax if the taxable price of the merchandise is 25 cents or less under Senate Bill 302/ House Bill 394 (both passed). A "bulk vending machine" is a vending machine that: (1) contains unsorted merchandise; and (2) dispenses the merchandise in approximately equal amounts at random without selection by the customer. General fund revenues are estimated to decrease by $200,225 in fiscal 2001, with this reduction increasing by 5 percent annually in future years.

Sales Tax Resale Certificates for Out-of-State Vendors

Under current law, sellers must generally collect the State sales and use tax at the point of sale unless: (1) the transaction is for $200 or more; and (2) the buyer presents a resale certificate with the buyer's name, address, and Maryland sales and use tax registration number. If an out-of-state vendor does not have a Maryland registration number, the tax must be paid at the point of sale, and a refund can be claimed by the purchaser. Many out-of-state vendors, particularly in the antiques and collectibles field, have complained that the existing requirements are burdensome and discourage them from purchasing items in Maryland for resale in their home state.

To ease the administrative burden for sellers and buyers when the buyer is an out-of-state vendor, House Bill 260 (passed) waives a seller's obligation to collect the sales and use tax on the sale of an antique or used collectible if the seller receives a resale certificate from a buyer with an out-of-state sales and use tax registration number and specified conditions are met. The bill provides that resale certificates for the sale of an antique or used collectible need not have a Maryland registration certificate number. Rather, the certificate could have a sales and use tax registration number from another state, if the certificate states that the buyer is an out-of-state vendor who does not regularly do business in the State. If the buyer provides an out-of-state registration number, the buyer must also provide a copy of a sales and use tax registration license issued to the buyer from that state. If the buyer is from a state without a sales and use tax, the buyer must provide a copy of a trader's license from that state or a comparable type of identification.

Prisoner of War Flags

Prisoner of war (POW) or missing in action (MIA) flags are exempt from the sales and use tax under Senate Bill 774/House Bill 663 (both passed).

Commercial Vessels