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Guidance Issued on New Required Information Reporting in Maryland—Potential Penalties of $10,000 per Day for Noncompliance

Maryland's new information reporting requirement adds a significant burden to C corporations filing in Maryland. We believe the legislature plans to use the information gathered to estimate the change in revenue if certain changes to the tax law are made. If other states follow Maryland's lead, taxpayers will bear the burden of estimating the revenue impact of potential tax law changes—a significant change in the way states do business.

Overview

In November 2007, Maryland passed legislation, which created new corporate information disclosure requirements applicable to corporations and certain affiliated entities required to file a Maryland corporate income tax return. These disclosure requirements are in addition to current income tax reporting requirements.

Under the new disclosure requirements, if the corporation is not part of an affiliated group, it needs to file online for an exemption in the initial year in order to avoid penalties. If the C corporation is part of an affiliated group, it must file an annual statement online including the following information:

• Pro-forma "water's edge" combined return under the Joyce method for the unitary group
  • The Joyce apportionment method requires a corporate group to include all affiliated entity sales in the denominator of the sales factor. The numerator includes only the Maryland sales of affiliated entities having Maryland nexus on a stand-alone basis.
• Pro-forma "water's edge" combined return under the Finnigan method for the unitary group
  • The Finnigan apportionment method requires a corporate group to include all affiliated entity sales in the denominator of the sales factor. The numerator includes the Maryland sales of all affiliated entities, regardless of whether any individual member has nexus on a stand-alone basis.
• The corporation's current Maryland sales apportionment factor
• The difference in Maryland tax that would occur if Maryland enacted the throwback rule, if any, and
• The amount and source of any nonoperational income (i.e., nonbusiness income) reported to Maryland or any other state that is not subject to apportionment

Penalties

If a corporation does not comply with the law, the penalty is $5,000 per day for the first 30 days following the due date of the report and $10,000 per day thereafter. In addition, the state will publish the name of any corporation and amount of penalty imposed on the corporation for failure to comply with the information reporting.

Due Dates

The disclosure requirements apply to taxable years beginning after December 31, 2005 and before January 1, 2011. Disclosures for 2006 tax returns are due on October 15, 2008 and by the extended due date for future corporate income tax returns including 2007 (October 15, 2008 for calendar year taxpayers). In addition, the corporation is required to report any changes to the statement within 60 days after the filing of an amended return or audit adjustment.

Mandatory Electronic Filing

All reports must be prepared and submitted electronically on the comptroller's Web site. The Web site became available September 12, 2008. Click here to file electronically.

Corporate Group

Currently, Maryland is a seperate company state, but the legislation requires informational reporting for a unitary group. Maryland defines its unitary corporate group to include an affiliated group or controlled group under Internal Revenue Code Section 1504 or 1563. The corporate group also includes an affiliated group, engaged in a unitary business, with more than 50% of the voting stock of each member owned directly or indirectly by a common owner(s) or by one or more members of the group. The definition excludes corporations not subject to federal income tax for any reason (such as S corporations), insurance companies and regulated investment companies. Keep in mind that even if exempt, an electronic reporting of that exemption is still required for the initial year.

The Maryland definition of corporate group is very broad and can include many corporations not typically included in a unitary group.

Water's Edge Report

Reports need to be filed that include all members of the unitary group, whether they have nexus with Maryland or not. Excluded corporations include corporations organized outside the United States whose activity within the United States is 20% or less of the business's total activity.

Conclusion

While the filing requirements might seem onerous, the penalties for noncompliance could total $3.5 million if a return is not filed for a year. As a result, we highly recommend complying. We can assist you in the process.

For more information, please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.