TAX TALK

Summary of the Year  2000 
State Tax Legislation

By Bruce C. Johnson, Linowes and Blocher LLP, and Andrea B. Gillespie, Thomas, Ronald & Cooper, P.A.

Without question, taxes (in particular, tax cuts) were not at the top of the General Assembly’s agenda for the first session of the new millennium. Taxes took a backseat to other more pressing issues, such as requiring the sale of trigger locks on firearms sold in the State of Maryland. Despite a $1 billion surplus, the average Marylander (except the gumball chewer) will have to wait until next year for any tax relief. For instance, next year the last phase of the 10-percent cut in the State’s income tax will be fully phased in. Next year, for one trial week in August, the State will lift its sales tax on clothing and shoes priced under $100.00.

This year, perhaps the most significant tax "cut" was the repeal of the 0.9% inheritance tax applicable to bequests to lineal descendants, which added brothers and sisters to this select group. Other tax legislation included the elimination of State sales tax on (i) vending items priced at 25 cents or less (e.g., gumballs); (ii) bottled water (sold in containers of one gallon or more); (iii) smoking-cessation products (e.g., nicotine patch, nicotine gum); (iv) energy-efficient appliances and vehicles; and (v) digital-broadcast equipment for TV and radio stations.

In addition, a few tax credits were enacted. A credit was given for adoption expenses up to $5,000.00 or up to $6,000.00 for a special-needs child. The credit of $3,500.00 was extended to include eventually fire and rescue workers with 36 months of service. A one-time maximum tax credit of $500.00 can now be used to offset the cost of long-term care insurance.

The following are brief summaries of those laws considered to be of some interest to our members. Please use these summaries for general informational purposes only, since some of the bills are still being rewritten to reflect last-minute changes by the General Assembly. Moreover, as of the date of this article, Governor Glendening has not signed into law the bills summarized below, and they remain subject to his veto.

Inheritance Tax

1. Beneficiaries’ Exemption from Inheritance Tax for Lineal Relatives and Siblings. Repeals the inheritance tax on property that passes from a decedent to or for the use of the decedent’s grandparent, parent, spouse, child, or other lineal descendant; stepparent, stepchild, or spouse of a child; brother or sister (new addition); or on property that passes from the decedent to or for the use of a corporation owned only by those above-listed relatives of the decedent; and applying the Act to decedents dying on or after July 1, 2000. The inheritance tax remains at 10% for property passing to any other non-excluded person (including nieces and nephews). (SB 1)

Sales and Use Tax:

2. Streamlined Sales Tax System for the 21st Century. Requires the Comptroller to discuss with other states the development of a multi-state, voluntary, streamlined system for the collection and administration of the sales and use tax. The discussions are required to focus on a system that will have the capability of determining whether a transaction is taxable or tax exempt, the appropriate tax rate to be applied to the transaction, and the total tax due on the transaction. The resulting system must provide a method for collecting and remitting sales and use taxes to the State. (HB 1421)

3. Maryland Clean Energy Incentive Act. Provides an exemption from the sales and use tax or energy-efficient heating and cooling equipment and fuel cell electric generating equipment; allows a motor-vehicle excise-tax credit for electric vehicles and vehicles with onboard rechargeable energy storage systems; also provides an income-tax credit for solar-powered equipment that generates electricity, heating, or air-conditioning. (SB 670/HB 20)

4. Television and Radio Station Sales Tax Exemption. Provides an exemption from the sales tax for sales of machinery or equipment that enables a television or radio station to comply with or to facilitate compliance with the Telecommunications Act of 1996 and to originate and broadcast or to receive and broadcast digital signals. Applies to sales made after January 1, 2000, but before January 1, 2008. (HB 794)

5. Tax-Free Back-to-School Week. The week of August 10 through August 16, 2001 (next year), will be a tax-free week during which the sales and use tax will not apply to the sale of clothing or footwear (excluding jewelry, watches, watchbands, handbags, handkerchiefs, umbrellas, scarves, ties, headbands, and belt buckles) costing less than $100. (SB 103)

6. Vehicle Excise Tax. Exempts from the vehicle excise tax a vehicle transferred to a niece or nephew of the transferor if it is (i) for no consideration and (ii) the transferor is at least 65 year of age. (HB 557)

7. No Tax on Smoking-Cessation Products. Exempts from the sales and use tax the sale of nicotine patches, nicotine gum, or any other product intended for use as an aid in ceasing the use of tobacco and approved by the United States Food and Drug Administration for that purpose. (SB 137)

8. Tax Exemption for Film Production Property. Provides sales and use tax exemption for tangible personal property and taxable services used in a film production activity by a film producer or production company certified by the Department of Business and Economic Development. (SB 192/HB 926)

9. Out-of-State Antique Dealers. An out-of-state buyer of antiques and collectibles for resale is exempt from Maryland sales and use tax as long as the buyer provides the vendor with a sales and use tax registration from another state, confirming that the buyer is an out-of-state vendor who does not engage in business in Maryland. (The Act requires additional documentation.) (HB 260)

10. Bottled Water. Exempts from the sales and use tax the sale of bottled water for human consumption, when sold in containers of 1 gallon or more. (SB 408/HB 328)

11. No Sales Tax on "Gum Balls". Tangible personal property, purchased from a bulk vending machine, for a taxable price of 25 cents or less is exempt from sales and use tax.  (SB 302/HB 394)

12. Vessel Repair Exemption. Exempts fuel or repair parts of any commercial vessel from sales and use tax. (HB 981)

Income Tax/Franchise Tax

13. Financial Institution Subject to Income Tax, Not Franchise Tax. Replaces the financial-institution franchise tax and the savings-and-loan-association franchise tax with the income tax as provided under Title 10 of the Tax-General Article. (SB 56)

14. Research and Development Tax Credit. Allows a state-income-tax credit in an amount equal to 3% of qualified Maryland research and development expenses, up to a total of $3,000,000 for all applicants, incurred during a taxable year; allows a credit in an amount equal to 10% of the expenses paid or incurred for Maryland research and development in excess of the base amount. This credit is also subject to a $3,000,000 ceiling for all applicants. (SB 309/HB 14)

15. Steam-generating Utility Equipment. Provides a credit against the corporate income tax for 60% of property taxes paid by a public utility on operating real property used to generate steam for sale (originally only for real property used to generate electricity); provides an additional modification under the corporate income tax in the amount of the credit; increases that category of property exempt from property tax to include property that is used to produce steam, or hot or chilled water, for sale to heat or cool a building (originally just machinery used to generate electricity). (SB 414)

16. Expanded Maryland Coal Tax Credit. Modifies a tax credit for the purchase of Maryland-mined coal so that the credit is now more readily available to a broader range of electricity suppliers. (HB 729)

17. Tax Credits for Alternative Commuting. Provides a tax credit for employers who provide a cash allowance to their employees equal to the regular parking subsidy. Nonprofit employers can pass this credit through to their employees by way of a credit for tax withholding. (SB 244/HB 310)

18. Tax Credit for Long-Term Care Insurance. Allows an individual a one-time State income-tax credit (up to $500) for a long-term care policy purchased after July 1, 2000, for 100% of the insurance premiums paid by the individual for the individual or the individual’s spouse, parent, stepparent, child, or stepchild if the insured is a Maryland resident. (SB 171)

19. Child and Dependent Care Credit. Increases the State income tax credit for child and dependent care expenses to equal the lesser of (i) 32.5% (originally 25%) of the federal child and dependent care credit or (ii) the State income tax for the taxable year. Increases the maximum level an eligible taxpayer may earn from $40,000 to $50,000 ($20,000 to $25,000 for a married taxpayer filing separately). (SB 335)

20. Increased Tax Deduction for Adoption Expense. Draws a distinction between adoption expenses incurred to adopt (i) a Maryland resident and (ii) a non-Maryland resident, for the purpose of giving a larger tax deduction for adopting Maryland residents. Increases the maximum amounts allowed as an income-tax deduction for expenses incurred by adoptive parents in the adoption of a child who is a Maryland resident at the time of the adoption, from $3,000 to $6,000 (remains $3,000 for non-resident) for a child with a special need; from $2,000 to $5,000 (remains $2,000 for non-resident) for a child without a special need. (SB 316)

21. County Earned Income Tax Credit. Permits the Counties and Baltimore City to provide refundable earned income tax credits (i.e., the taxpayer may receive a refund to the extent the amount of the credit exceeds his income-tax liability) for individuals having one or more dependents that can be claimed as exemptions. (SB 240)

22. IRA Income Not Excludible. Clarifies that income from such plans as an IRA, SIMPLE, an ineligible deferred compensation plan, etc., can not be excluded, by the elderly or disabled, from Maryland taxable income (as opposed to income from an employer-provided retirement plan). (See Section 10-209 Tax-General Article.) (SB 401)

23. Tax Deduction for Handrails. Allows an income-tax deduction for expenses incurred after 1999 to purchase and install handrails in existing elevators in health-care facilities and buildings in which at least 50% of the space is used for medical purposes. (HB 1103)

24. Emergency Workers’ Tax Deduction. Reduces, over a period of 4 years, the duration of service required in bona fide Maryland volunteer fire, rescue, or emergency medical service organizations from 72 months to 36 months, in order for an individual to be eligible for a $3,500 income-tax deduction. (HB 1303)

Personal Property Tax

25. Easier Transfer of Foreclosed Property. Adds transfers by deed in lieu of foreclosure to those transfers exempted from the requirements for payment of personal property taxes before the property may be transferred on the assessment books. Also provides that property so transferred is free from any unrecorded personal property tax liens. (HB 157)

26. Manufacturing Personal Property May Not Be Exempt: Clarifies that the sales and use tax exemption that applies to production-activity personal property does not exempt personal property that is installed in such a way that it becomes real property; expands the exemption to include personal property used to comply with a pollution-control law even if installed, so that the personal property becomes real property. (SB 191)

27. Community Association Property Tax Credit. Authorizes Baltimore City, a County, or a municipal corporation to grant a property tax credit on personal property owned by community associations. (HB 671)

28. Dentistry Equipment in Depressed Areas. In order to encourage dentists to locate their practices in areas under-served by dentists, Baltimore City, any County, or a municipal corporation may grant a tax credit against the property tax imposed on personal property used in practicing dentistry in a geographic area of the State that is designated by the Secretary of Health and Mental Hygiene as being under-served by dentists. (SB 874)

29. Property Eligible for both Property Tax Credit and/or Exemption. To end confusion, provides that a law granting or authorizing a property tax credit may not be construed to affect eligibility of any entity for a property-tax exemption; and provides for the prospective application of the Act. (SB 331)

Homeowners’ Property Tax Credit

30. Change in Eligibility Period. Permits the purchaser of a home eligibility for the homeowners’ property tax credit as long as the purchaser occupies the residence for the remainder of the tax year (formerly, no less than 6 consecutive months). (HB 589)

31. Earlier Application Period. Authorizes certain low-income home purchasers to apply for a homeowners’ property-tax credit after (i) execution of a contract of sale on a dwelling, or (ii) settlement (formerly, only after settlement); if the purchaser applies for the credit prior to settlement. The application must be filed 7 working days after the execution of a contract of sale, and the purchaser must provide the State Department of Assessments and Taxation (SDAT) with a copy of the executed contract of sale. The SDAT determines the amount of the tax credit a home purchaser may receive; and it must provide written notice of its decision to an applicant within 5 working days. (HB590)