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Computer Services Tax Implications

The General Assembly concluded its three week special session by enacting $1.4 billion in new taxes, $400 million in possible future state budget reductions and authorizing slots at up to five locations, if approved at referendum by the voters in November 2008.

The share of new taxes paid by Maryland businesses will exceed $800 million.

The final package of six bills differs significantly from the Governor's original proposals, but should resolve the projected state general fund structural deficit and pump more than $400 million annually into state transportation projects.

Corporate Taxes

The corporate income tax rate will increase from 7 percent to 8.25 percent effective for taxable years beginning after December 31, 2007.

Although combined reporting was defeated, a 17-member Maryland Business Tax Reform Commission will study changes to the state's business taxes over the next four years. The Maryland Chamber of Commerce will have the only business member on the commission.

New extensive and onerous reporting requirements will be imposed on corporations as part of their corporate tax return and for publicly traded companies with any minimal business activity in Maryland, effective for taxable years beginning after December 31, 2005 (see pages 40 to 49 of SB 2).

Sales Tax

Sales tax rate increased from 5 percent to 6 percent effective January 3, 2008.

Vendor credit limited to $500 per return from January 3, 2008 to June 30, 2011. Vendors would be allowed to assume or absorb the sales tax.

Sales tax imposed on certain "computer services" from July 1, 2008 to June 30, 2013 (see pages 24 and 25 of SB 2).

Individual Income Tax

New brackets of:

5% of income over $150,000 indiv./$200,000 joint
5.25% of income over $300,000 indiv./$350,000 joint
5.5% of income over $500,000
Personal exemption is increased from $2,400 to $3,200, but phased-out at incomes above $125,000 indiv./$175,000 joint.

Transportation

Titling tax increased from 5 percent to 6 percent, with a full trade-in allowance, for titles issued on or after January 1, 2008.

No gas tax increase.

Transportation to receive roughly 50 percent of the sales tax rate increase and other revenues for a total state transportation revenue increase of more than $400 million annually.

Slots

Up to 15,000 video lottery terminals at no more than five locations.

Implementation of slots would be dependent on the passage of a state constitutional amendment at a referendum at the November 2008 election. The state share of revenues would be dedicated to funding education aid, school construction and higher education construction.

Everything Else

Cigarette tax increased from $1 to $2 a pack effective January 1, 2008.

Transfer and recordation taxes will be imposed on transfers of controlling interests in business entities with Maryland real property as their primary asset, effective July 1, 2008.

Local governments would be authorized for the next three years to impose higher taxes on the equipment and machinery used to generate electricity, steam or hot or chilled water for sale.

Higher education institutions will receive $16 million in fiscal year 2008 and $55.5 million in fiscal year 2009 in a Higher Education Investment Fund. Future funding would be dependent on legislation enacted in 2008.

State Medicaid eligibility would be increased to 116 percent of federal poverty guidelines, but services would be limited unless the state general fund achieves designated revenue targets. Employers with fewer than 10 employees who have not offered health insurance benefits within the past 12 months and agree to meet certain conditions would be eligible to receive a state subsidy to provide health insurance. Prominent health insurance carriers would be required to offer wellness programs in the small group market.

A Chesapeake Bay 2010 Trust Fund is established and annually funded at more than $50 million of gas tax and rental vehicle revenues. The revenue from this special fund will be used by state and local agencies to pay for a variety of Chesapeake Bay-related projects.

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