Special Session Report on Real Estate
The Special Session of the Maryland General Assembly, which began on October 29, 2007 to deal with Maryland Government’s structural budget deficit, ended in the wee hours of November 19th. After three weeks of intense work by both chambers, the Governor signed into law a series of bills that will resolve Maryland’s structural deficit through a combination of spending cuts, tax increases, and a constitutional amendment authorizing a referendum on slot machine gambling in Maryland.
The Special Session also culminated almost a year of intense work by the Maryland Association of REALTORS® (MAR) to stop taxation of real estate services. After tens of thousands of legislator contacts, a state-wide media campaign, personal meetings with Legislators, the Governor and Comptroller, and Local REALTOR® Associations and Boards transporting hundreds of REALTORS® to Annapolis to protest such taxes, the Legislature refused to extend sales and use taxes to property management services or any other real estate services.
The following information outlines the outcome of several real estate provisions that MAR lobbied during the Special Session, as well as an outline of general provisions of the tax packages.
SPECIAL SESSION: REAL ESTATE PROVISIONS
* Tax on Property Management Services: The tax on property management services was defeated. The final version of the Tax Reform Act extended the sales tax only to computer services. The new law defines computer services to include custom computer programming, computer repair, and other services (excluding internet related services).
* Green Fund: Originally proposed as an impact fee last year, the Green Fund was redrafted as a flat, annual fee on all residential and commercial property. The fee would have been very small for most homeowners ($5 - $20 per year), but the impact on certain commercial properties was significant, and MAR opposed the legislation. When both the House and Senate met on this proposal, the Green Fund was renamed the Chesapeake Bay 2010 Trust Fund, and real estate was removed as a funding source. Instead, the General Assembly approved general fund appropriations, and dedicated revenue from the motor fuel tax and rental car tax as the funding sources.
* Maryland Resident Real Estate Withholding Tax: One troublesome proposal introduced during the Special Session was a bill that would have raised revenue for the State by creating a Maryland Resident Real Estate Withholding Tax. The legislation would have subjected all Maryland residents to a 4.75% withholding tax on any gain from the sale of their real estate when net proceeds of sale exceed $250,000 or $500,000, based on the seller’s tax filing status. MAR worked to defeat the legislation before the Senate Budget and Taxation Committee, which ultimately chose not to include this provision in the Tax Reform Act.
* Change of Residency from 6 months to 3 months: A bill introduced in the Senate would have required a nonresident of Maryland to file Maryland taxes if that person resided in Maryland for more than 3 months in order to capture revenue from “snowbirds” who live in low tax states like Florida but still keep Maryland property. Although this legislation was not accepted by the Senate Budget and Taxation Committee, it was added to the Senate version of the Tax Reform Act by means of a floor amendment that passed 24-23. MAR worked to remove this provision when the Senate bill was considered by the House. As a result, the House did not include a similar provision in its version of the Tax Reform Act, and the provision was removed from the final bill.
* State Property Tax Reduction: Both the House and Senate Tax Committees removed the Governor's proposed reduction in the State Property Tax. As proposed by the Governor, this provision would have reduced the state property tax by about three cents over a three-year period. While MAR supported such a change, the Legislature did not believe that it could afford to give this tax break when other taxes were being increased.
* Controlling Interests: The Tax Reform Act also passed “controlling interests” legislation. As drafted, this provision would levy real estate recordation and transfer taxes on the transfer of a “controlling interest” in a real property. To trigger the taxes, more than 80% of the controlling interest in the business entity would have to be transferred. In addition, the business entity would have to be valued at more than $1 million and real property would have to constitute more than 80% of the value of the business entity. An amendment supported by MAR and other commercial real estate groups delayed the effective date of the law until July 1, 2008.
SPECIAL SESSION: OUTLINE OF THE MAJOR PROVISIONS
SB 2 – Tax Reform Act of 2007
* Sales Tax Expansion to Computer Services
This includes computer facilities management and operation; custom computer programming; computer system planning and design that integrate computer hardware, software, and communication technologies; computer disaster recovery; data processing, storage, and recovery; hardware or software installation, maintenance, and repair.
* Does not include: internet access, as defined in the federal Internet Tax Freedom Act; typing or data entry on word processing equipment; computer training; installation, maintenance , or repair of tangible personal property other than computer hardware or software that includes computer hardware or software as a component part; or a service otherwise described in paragraph (1) of this subsection that is provided as part of or in connection with: electronic fund transfers, financial transactions, automated teller machine transactions, or other banking or trust services; business management, account management, personnel, payroll, employee benefit, or other administrative services; OR telecommunication services.
This tax will sunset at the end of June 30, 2013 if no further action is taken by the General Assembly. There is also a reporting requirement in December 2009 and 2011 regarding the effect of the tax on sales and use tax revenue to be completed by the Comptroller.
Effective Date: July 1, 2008.
* Income Tax Changes
Business
* Subchapter S/Partnership Rate: 5.5% plus county rate
* Effective Date: Tax years after December 31, 2007
* Corporate Rate: 8.25% of taxable income
* Effective Date: Tax years after December 31, 2007
* Combined Reporting: although corporations will not be taxed under a combined reporting regime, the Tax Reform Act includes extensive reporting requirements for corporations that are defined as an “affiliated group” under §1504 and § 1563 of the Internal Revenue Code
* Effective Date: Tax years after December 31, 2006
* Clarification of Section 179 Deduction: Clarifies that the deduction against MD taxes is subject to a $25,000 dollar limitation and a $200,000 phase-out threshold.
* Effective Date: Tax years after December 31, 2007
Individuals
* Single-Filers:
* 4.75% -- $3,001 - $150,000 (taxable income)
* 5.00% -- $150,001 - $300,000
* 5.25% -- $300,001 - $500,000
* 5.50% -- $500,001 and above
* Joint-Filers:
* 4.75% -- $3,001 - $200,000 (taxable income)
* 5.00% -- $200,001 - $350,000
* 5.25% -- $350,001 - $500,000
* 5.50% -- $500,001 and above
* Effective Date: Tax years after December 31, 2007
* Controlling Interest
Recordation and transfer taxes will apply if more than 80% of the controlling interest in a real property entity transfers, and if real property constitutes more than 80% of the value of the real property entity. The total value of the real property entity must exceed $1 million.
Exempt transfers include those between: certain relatives; transfers that are completed over a period of more than twelve months; non-intentional transfers; sales of a series of shares of a publicly traded entity; subsidiaries and partnerships comprised of same people.
Effective Date: July 1, 2008; applies to all transfers of controlling interest by a real property entity that occur after June 30, 2008.
HB 5 – Transportation and State Investment Act
* Sales and Use Tax
Increases the rate from 5% to 6%
Allows a vendor to pay the tax on behalf of the buyer
Effective Date: January 3, 2008
* Vehicle Titling Tax
Increases the rate from 5% to 6%
Effective Date: January 1, 2008 (applies to certificates of title issued after this date)
* Establishes the Chesapeake Bay 2010 Trust Fund
Funding Sources: Revenue appropriated to the fund through the state budget and revenue from the motor fuel tax and rental car tax
Fund Purpose: The fund is established to for the implementation of the State’s tributary strategy under the Chesapeake 2000 Agreement
* Effective Date: July 1, 2008
HB 1 – Budget Reconciliation Act
* Electric Generating Equipment
Temporarily changes the percent (from 50-65% and then back down to 55%) of electric generating equipment that can be assessed for property tax purposes
Effective Date: Taxable years beginning after June 30, 2008
* Program Open Space
Changes the distribution of certain mandated appropriations in the fund to include the Forest and Park Service and mandating that “controlling interest” revenue be used for this purpose
Effective Date: Fiscal year 2009 and after.
* Mandated Spending Analysis
Requires any mandated appropriations to have a fiscal impact analysis completed
Effective Date: July 1, 2008
* Circuit Court Real Property Records Improvement Fund
Allows the fund to be used for any technology development needs of the Judiciary during FY 2009-2010
Removes the sunset provisions of the fund.
Effective Date: January 1, 2008
* Bureau of Revenue Estimates
Makes mostly administrative changes to the Bureau of Revenue Estimates under the Comptroller, and requires certain additional reporting requirements
Effective Date: January 1, 2008
* Elimination of State Jobs
Recommends the elimination of 500 vacant state jobs
Effective Date: By January 30, 2008
* Spending Reduction
Directs Governor to seek reductions of $550 million in FY 2009 budget