On April 24, 2018, Governor Larry Hogan signed into law SB 1090 (Ch. 341) and HB 1794 (Ch. 342) (collectively, "the new law") which enacts the phase-in of a single sales factor apportionment formula for most corporate taxpayers by 2022. The new law also allows a taxpayer qualifying as a worldwide headquartered company to annually elect to use a three-factor apportionment formula. These changes apply to all tax years beginning after December 31, 2017.

Under current law, multistate corporate taxpayers (except manufacturing corporations) must apportion income to Maryland using a three-factor apportionment formula consisting of a property, a payroll and a double-weighted sales factor. For multistate corporations that conduct a unitary business, the single sales factor apportionment formula will be phased-in over five years as follows:

— For tax years beginning in 2018, the apportionment formula will be a property, a payroll, and three-times sales factor with a denominator of five.

— For tax years beginning in 2019, the apportionment formula will be a property, a payroll, and four-times sales factor with a denominator of six.

— For tax years beginning in 2020, the apportionment formula will be a property, a payroll, and five-times sales factor with a denominator of seven.

— For tax years beginning in 2021, the apportionment formula will be a property, a payroll, and six-times sales factor with a denominator of eight.

— For tax years beginning in 2022 and thereafter, the apportionment formula will be a single sales factor.

A taxpayer that qualifies as a worldwide headquartered company¹ may annually elect to compute its Maryland income by using the existing three-factor apportionment formula consisting of a property, a payroll and a double-weighted sales factor. Worldwide-headquartered companies making such an election must include gross income from intangible investments (e.g., dividends, interest, royalties, and capital gains from the sale of intangible property) in the calculation of their sales factor numerator based on the average of the property and payroll factors.

Taxpayers qualifying as a manufacturing corporation, as under current law, must still use a single sales factor apportionment formula.

Implications

Maryland joins a growing list of states that have adopted a single sales factor apportionment formula. The single sales factor formula, which will be fully phased-in by 2022, applies to most corporations. Each year, taxpayers qualifying as a worldwide headquartered company will need to determine which apportionment formula is most beneficial to use.

Further, the new law's requirement for sourcing gross income from intangible investments only applies to Maryland worldwide-headquartered companies; it does not address sourcing such income for non-Maryland headquartered companies. Maryland's sourcing rules are set forth in Maryland Reg. 03.04.03.08. It is not yet known whether the Maryland Department of Treasury will update the regulation to reflect the law change, and perhaps provide additional guidance for non-Maryland headquartered companies on sourcing gross income from intangible investments. Considering the elective, favorable treatment Maryland-headquartered companies may have under this provision, the statute may raise constitutional questions.

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ENDNOTES

¹ A "worldwide headquartered company" is defined by the Maryland statute as "a corporation included in a group of corporations including a parent corporation that: (1) filed a Form 10-Q with the Securities and Exchange Commission for the quarterly period ending June 30, 2017; (2) has its principal executive office in [Maryland]; (3) employs at all times between July 1, 2017, and June 30, 2020, at least 500 full-time employees at the partner corporation's principal executive office that is located within [Maryland]."