Maryland tax processing problems frustrate business owners | GUEST COMMENTARY

Companies doing business in the state of Maryland are no strangers to regulation and taxes. So, when Maryland introduced a special business tax that would provide federal tax relief to Maryland businesses, there was widespread cheer. Unfortunately, government inefficiency in the state has caused a rare tax incentive to be more of a headache than it’s worth for many business owners and tax professionals.

In 2017, Congress passed a sweeping tax reform called the Tax Cuts and Jobs Act. This legislation provided tax relief to both individuals and businesses across the income spectrum. However, one key cost-saving measure of this legislation was the $10,000 cap on the deduction of state and local taxes for individual income taxpayers. This was considered a highly controversial part of the bill because it disproportionately took federal tax relief away from individuals who live in high-tax states.

In 2020, the Maryland General Assembly passed a bill that provided certain business owners relief from this limitation. The legislation created a “pass-through entity tax” (PTE), which allowed owners of partnerships, LLCs, and S corporations to pay Maryland taxes at the business entity level. Typically, these businesses “pass through” their income from the business to be reported and taxed on the business owner’s individual tax return. By paying taxes at the entity level, these business owners were able to deduct the state taxes paid as a deduction against their taxable business income without being subject to the $10,000 limitation. The taxes paid on the business return would then be provided as a refundable Maryland tax credit when the business owner filed their individual taxes to avoid double taxation. This treatment was approved by the Internal Revenue Service and almost every other state with income tax has followed suit with similar entity-level taxes.

Unfortunately, what was widely lauded as a great relief for taxpayers soon became a nightmare for many business owners who wanted to follow the rules to reduce their taxes. If you ask any tax professional in Maryland about the Maryland pass-through entity tax, there is a good chance they will shake their head and rant about the nuisance this tax has been from an administrative standpoint.

The problems started from the very beginning. The Maryland General Assembly amended state tax laws on July 1, 2020, to allow resident members of entities to elect to pay income tax at the entity level. Then on Feb. 15, 2021, Maryland Senate Bill 496 was signed into law to allow all members (resident and non-resident) to elect entity-level tax. It was not until June 29, 2021, that tax forms were released by the Maryland comptroller. This was nearly one year after legislation passed and only 17 days before COVID relief funds impacted due dates for pass-through entity income tax returns.

Shortly after the 2020 filing season and the debut year for the pass-through entity tax, notices started coming in the mail. These business owners reached out to their tax professionals with anxiety because the state of Maryland demanded large sums of taxes after they already paid their tax liability in full. As it turned out, the Comptroller of Maryland had not properly accounted for, nor provided, these taxpayers with the credits they were entitled to.

Sometimes the notices could be resolved by simple correspondence from the tax professional to the Comptroller’s Office. However, the processing of these requests could take months. Taxpayers often received 2nd and 3rd notices that would contain intent to levy warnings. Some taxpayers who were due a refund would have to wait months to more than a year to receive their overpaid funds.

While most tax professionals attributed this initial dysfunction to bureaucratic growing pains related to a new tax system that the Comptroller’s Office had to administer, the poor service related to the pass-through entity tax has not subsided. In many cases, the dysfunction has gotten worse. This has caused a large amount of wasted time and resources for Maryland taxpayers and their tax advisors.

One recent instance of this relates to a colleague of ours who contacted the Maryland Comptroller’s Office to resolve an erroneous notice issued to a taxpayer regarding Maryland PTE. The tax professional was told that only a 90-day hold could be placed on the account even though the agent at the Comptroller’s Office openly indicated it would take longer than that to resolve. This agent also indicated that there are over 30,000 similar issues regarding PTE credits still to be resolved. While it is difficult to tell how many refundable dollars are involved, the amount could be in the tens of millions of dollars.

Interactions like this have become commonplace when dealing with PTE notices and the Office of the Maryland Comptroller. These notices affect entities and taxpayers of all sizes.

It is apparent that the Comptroller’s Office does not have adequate strategies or resources available to properly administer these business owner-friendly income tax provisions. Modernization of their technology infrastructure and hiring and training more qualified employees may be a solution. The current service they are providing Maryland taxpayers is unacceptable. These negative interactions and delayed refund payments from the Comptroller’s Office can only further push Maryland companies and their business owners to relocate to other states, which hurts all of us.

Tom Harvey (tharvey@gma-cpa.com) and Tyler J. von Lange (tvonlange@gma-cpa.com) are certified public accountants and tax managers at Gross, Mendelsohn & Associates P.A.