Maryland Eyes Global Tax Rule for Unitary Businesses

March 29, 2024

The Debate Over Maryland’s Tax Policy

In a move that could have significant implications for businesses operating within its borders, Maryland’s House Appropriations Committee has introduced a contentious amendment to the state’s budget bill. The proposed change, which is currently under the scrutiny of a conference committee, could see corporations that are part of unitary business groups being taxed on their global taxable income.

The amendment, cited as section 10-402.1 in the bill, aims to redefine how Maryland modified income is calculated. This would involve aggregating the profits and losses from all foreign branches, adjusted by the Maryland apportionment factor. This factor is essentially a ratio of the corporation’s sales in Maryland to its total global sales. The intention behind this is to capture a more accurate representation of a corporation’s economic activity within the state.

However, the proposal has sparked debate due to its potential to reduce taxable income in Maryland. For example, if a corporation’s profitability in a foreign market like Germany is lower than in Maryland, the Maryland modified income could be less than what would be apportioned under the current system. Additionally, the complexity of currency exchange calculations and adjustments to conform to Generally Accepted Accounting Principles (GAAP) adds layers of complication to an already intricate process.

Moreover, the amendment would grant broad authority to the comptroller of Maryland, allowing for discretionary measures that could increase a corporation’s tax liability if it is believed that reported income does not adequately reflect state-taxable activity. This could introduce unpredictability and potentially create a competitive disadvantage for businesses in Maryland.

The policy of worldwide combined reporting has been met with skepticism from various quarters. Critics argue that it increases complexity and transaction costs for corporations and may not significantly boost state revenues. The Institute on Taxation and Economic Policy (ITEP) provided an optimistic revenue projection for Minnesota’s adoption of a similar policy, but this was later challenged by organizations like the Tax Foundation and COST, which highlighted flaws in ITEP’s assumptions.

Despite these concerns, the Maryland House Appropriations Committee estimates that the provision could generate substantial revenue in the coming years. However, the methodology behind these estimates remains unclear, casting doubt on their reliability.

As Maryland deliberates over this potential shift in tax policy, businesses and tax professionals alike are closely monitoring developments. The outcome of this debate could set a precedent for other states considering similar measures and will undoubtedly influence corporate decision-making regarding investment and operations in Maryland.

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