Single sales factor apportionment

In March, we reported that Maryland’s General Assembly was considering two bills that would adopt single sales factor apportionment in Maryland. (See our earlier alert on the proposed legislation.) On April 24, 2018, Maryland’s governor signed two identical bills (S.B. 1090 and H.B. 1794) into law (Chapters 341 and 342 of the Acts of 2018) that will gradually phase in a single sales factor apportionment formula for corporate income tax purposes according to the following schedule:

  • From January 1, 2018, through December 31, 2018, the sales factor will be triple-weighted, plus payroll and property, with a denominator of five;
  • From January 1, 2019, through December 31, 2019, the sales factor will be quadruple-weighted, plus payroll and property, with a denominator of six;
  • From January 1, 2020, through December 31, 2020, the sales factor will be quintuple-weighted, plus payroll and property, with a denominator of seven;
  • From January 1, 2021, through December 31, 2021, the sales factor will be sextuple-weighted, plus payroll and property, with a denominator of eight;
  • From January 1, 2022, and thereafter, a single sales factor will be used.

On April 25, 2018, the day after Governor Hogan signed S.B. 1090 and H.B. 1794, the Comptroller of Maryland, Peter V.R. Franchot, told the authors of this alert that he was pleased the bills were signed into law, but he would have preferred an immediate application rather than a phase-in.

Companies meeting the definition of a “worldwide headquartered company” may continue to use a three-factor formula with double-weighted sales. After December 31, 2021, a worldwide headquartered company may annually elect to use either the single sales factor formula or the three-factor formula with double-weighted sales. A “worldwide headquartered company” is defined as a company that filed a federal corporate income tax return for the taxable year, filed a 10-Q with the SEC for the quarterly period ending June 30, 2017, has its principal executive office in Maryland, and employs at least 500 full-time employees between July 1, 2017, and June 30, 2020. Worldwide headquartered companies that elect to use a three-factor apportionment formula must include gross income from intangible investments from the sale of intangible property in the calculation of the numerator based on the average of the property and payroll factors.

A unique component of Maryland’s single sales factor law is the carve-out for certain worldwide headquartered companies. This may raise some constitutional issues. In Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977), the U.S. Supreme Court developed a four-prong test to determine whether a state tax unconstitutionally burdens interstate commerce. This test requires that a tax: (1) be applied to an activity with a substantial nexus with the taxing state; (2) be fairly apportioned; (3) not discriminate against interstate commerce; and (4) be fairly related to the services provided by the state. Companies headquartered outside Maryland may have an argument that this discriminates against interstate commerce. Generally speaking, “discrimination” as it relates the third prong of the test means “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Oregon Waste Sys., Inc. v. Dept. of Envtl. Quality of State of Or., 511 U.S. 93, 99 (1994).