Friday 5 | February 14, 2020

On this day in 1919, the United Parcel Service (UPS) was formed. Happy Valentine’s Day.

1. Debate on digital ad tax continues—The debate over legislation that would establish a new digital advertising gross revenue tax of up to 10% on annual gross revenues derived from digital advertising services in the state continues. If it enacts Senate Bill 2, Maryland would become the first state in the U.S. to impose a targeted punitive tax on the gross revenue of digital advertising services.

As drafted, SB 2 presents innumerable constitutional and policy concerns, not the least of which is an overt violation of the Permanent Internet Tax Freedom Act. In addition, SB 2 may violate the Equal Protection Clause of the U.S. Constitution due to a lack of rational basis for discriminating against advertising services provided on a digital interface since the law does not impose the same treatment on advertising that does not occur on a digital interface. It also raises concerns relative to the First Amendment, since the tax would effectively regulate commercial speech by forcing only digital advertising service providers in Maryland to either cease allowing Maryland customers to view ads or by substantially increasing fees charged to companies advertising on their platform.

Of greatest concern to the Chamber is that the economic burden of SB 2 will ultimately be borne by Maryland businesses and consumers of advertising services within a digital interface—including websites and applications. As a result of this tax, advertising service providers will pass through the increased costs to their customers. This includes local Maryland businesses that utilize online platforms to reach new customers. Although the intended targets of this tax are large global corporations, it is Marylanders who will feel it most in the form of higher prices and lower revenues.

The digital advertising ecosystem benefits entities of every type across the entire spectrum of Maryland’s economy. The ad-supported business model empowers online creators and allows them to support themselves through their content. By delivering ads to consumers who are most likely to be interested in them, modern online advertising is critical to organizations that want to reach the right audiences in a cost-effective manner. Nonprofits can reach new donors and supporters who are likely to be interested in supporting their cause, and startup small businesses can advertise their services to audiences who are most likely to be interested and try them over the “big guys.” All these entities would suffer from the increased higher cost of digital ads due to the tax SB 2 would mandate, which would ultimately be passed on to the Marylanders who use digital advertising.

If you are concerned about the impact that this legislation will have on your business, please reach out to your elected officials. If you are also willing and able to participate at a higher level in our advocacy efforts, please reach out to Ashley Duckman (aduckman@mdchamber.org).

The House cross-file, HB 695, will be heard by the House Ways & Means Committee on February 28 at 1 p.m.

2. Hearings scheduled for Paid Family & Medical Leave Insurance Program— Hearings have been scheduled in both the House and Senate on HB 839 and SB 539, legislation that would establish a Family & Medical Leave Insurance (FAMLI) Program.

The program generally provides up to 12 weeks of benefits to an employee who is taking partially paid or unpaid leave for the following reasons: 1) to care for a child during the first year after the child’s birth or after the placement of the child through foster care or adoption; 2) to care for a family member with a serious health condition, 3) because the employee has a health condition that results in their being unable to perform the functions of their job, 4) to care for a service member who is the employee’s next of kin, or 5) because the employee has an exigency arising out of the deployment of a service member who is a family member.

The bill establishes the FAMLI Fund, which will consist of contributions from employees, employers and self-employed individuals. Beginning January 1, 2021, each employee, employer and self-employed individual shall contribute to the fund. The total rate of contribution: 1) may not exceed 0.5% of an employee’s wages, 2) shall be applied to all wages up to and including the Social Security wage base, 3) shall be shared equally by employers and employees, and 4) shall be sufficient to fund the benefits payable.

There are any number of additional nuances and complexities outlined in the language, and the Chamber is very concerned that the implementation of this legislation will result in additional costs and administrative burden to employers, and in particular small businesses. Through our MDCC Paid Family & Medical Leave Work Group, the Chamber has attempted to work with the advocates for this program to outline our concerns and encourage changes to the bill. Unfortunately, these changes, some of which help the bill more closely align with federal law and seek to address some of the challenges for small businesses, were not accepted. The Chamber will continue to work with stakeholders toward a better outcome on this issue.

• HB 839 has a hearing scheduled in the House Economic Matters Committee on Monday, February 24, at 1 p.m.
• SB 539 has a hearing scheduled in the Senate Finance Committee on Thursday, February 27, at 1 p.m.

In advance of these hearings, we would urge you to contact your legislators to share your concerns with the bill.  If you wish to participate in either hearing in opposition, please contact Ashley Duckman (aduckman@mdchamber.org).

3. Recap: Marathon of tax hearings this week—This week, the Senate Budget & Taxation and House Ways & Means Committees held marathon hearings on multiple pieces of tax legislation of significance to the business community. The Chamber is monitoring this legislation, and a summary of those bills and our position is included below.

• SB 397—Sales-and-Use and Personal Property Tax–Exemptions–Data Centers: SUPPORT

Providing an exemption from the sales-and-use tax for certain sales of certain qualified data center personal property for use at certain qualified data centers under certain circumstances; requiring an individual or a corporation to apply to the Department of Commerce for an exemption certificate; authorizing the governing body of a county or municipal corporation to reduce or eliminate the assessment of certain personal property used in certain qualified data centers; etc.

• SB 448—Sales-and-Use Tax–Vendor Collection Credit–Job Training: SUPPORT

Authorizing certain vendors who are qualified job training organizations to claim a credit for the expense of collecting and paying the sales-and-use tax; prohibiting a vendor from claiming certain credits against the sales-and-use tax if the vendor claims a certain credit; requiring a vendor to be certified as a qualified job training organization before claiming a certain credit; authorizing a vendor to submit a certain application to the Secretary of Labor; etc.

• SB 523—Income Tax—Pass-Through Entities–Imposition of Tax: SUPPORT

Altering the tax imposed on certain pass-through entities; requiring each pass-through entity to pay the tax imposed with respect to certain shares of certain nonresident and nonresident entity members of the pass-through entity; authorizing a pass-through entity to pay the tax imposed with respect to certain shares of all members of the pass-through entity; providing for the calculation of the tax; prohibiting the tax required to be paid for any taxable year from exceeding a certain amount; etc.

• HB 129—Taxes–Election for Pass-Through Entities: SUPPORT

Altering the tax imposed on certain pass-through entities; requiring each pass-through entity to pay the tax imposed with respect to certain shares of certain nonresident and nonresident entity members of the pass-through entity; authorizing a pass-through entity to pay the tax imposed with respect to certain shares of all members of the pass-through entity; providing for the calculation of the tax; prohibiting the tax required to be paid for any taxable year from exceeding a certain amount; etc.

• HB 222—Income Tax Rates–Capital Gains Income: OPPOSE

Providing for an additional state individual income tax rate of 1% on net capital gains of individuals; applying the Act to taxable years beginning after December 31, 2019; etc.

• HB 223—End Ineffective Business Subsidies Act of 2020: OPPOSE

Prohibiting the Secretary of Commerce from designating or expanding certain enterprise zones and focus areas on or after June 1, 2020; providing for the termination of the One Maryland Economic Development Tax Credit Program on January 1, 2022; applying the Opportunity Zone Enhancement Program to taxable years 2019 through 2021; prohibiting the Department of Commerce from issuing tax credit certificates to certain investors in certain biotechnology companies on or after January 1, 2022; etc.

• HB 224—Opportunity Zone Tax Deduction Reform Act of 2020: OPPOSE

Requiring certain taxpayers to add a certain deduction for gains from sales or exchanges of qualified opportunity zone property back to federal adjusted gross income to determine Maryland adjusted gross income; requiring certain taxpayers to add a certain deduction for gains from sales or exchanges of qualified opportunity zone property back to federal adjusted gross income to determine Maryland modified income; and applying the Act to taxable years beginning after December 31, 2019.

• HB 295—Corporate Income Tax–Combined Reporting: OPPOSE

Requiring affiliated corporations to compute Maryland taxable income using a certain combined reporting method; requiring the comptroller to report by March 1 of each year an estimate of the total additional tax revenue from corporations to be collected in the next fiscal year as a result of the combined reporting method; requiring the comptroller to distribute certain revenue from corporations to The Blueprint for Maryland’s Future Fund; etc.

• HB 439—Income Tax–Carried Interest–Additional Tax: OPPOSE

Imposing a tax of 17% on the Maryland taxable income attributable to certain investment management services of an individual or a corporation or the distributive share of a pass-through entity; providing that the tax does not apply to investment management services if at least 80% of the specified assets consists of real estate; terminating the Act if certain federal legislation is enacted into law; applying the Act to taxable years beginning after December 31, 2019; etc.

• HB 473—Corporate Income Tax–Throwback Rule: OPPOSE

Requiring that certain sales of tangible personal property be attributed to the state for apportionment purposes under the corporate income tax if the corporation is not taxable in the state of the purchaser; and applying the Act to taxable years beginning after December 31, 2019.

• HB 507—Income Tax—Pass-Through Entity–Additional Tax: OPPOSE

Imposing a state income tax on income distributed to certain members of certain pass-through entities from the pass-through entity’s taxable income exceeding $1,000,000; providing that the tax does not apply to the income of a pass-through entity that is a sole proprietorship or has implemented a certain employee stock ownership plan; applying the Act to taxable years beginning after December 31, 2019; etc.

• HB 525—Phase Out Company Giveaways Act: OPPOSE

Establishing the Interstate Compact to Phase Out Company Giveaways as a compact among member states; stating the findings of member states; prohibiting member states from offering or providing certain company giveaways as an inducement to relocate certain facilities to a member state subject to certain exclusions; authorizing member states to withdraw from the Compact with six months’ notice in a certain manner; establishing the National Board of the Interstate Compact to Phase Out Company Giveaways; etc.

• HB 565—Income Tax–Business and Economic Development Tax Credits–Termination: OPPOSE

Prohibiting the Secretary of Commerce from designating or expanding certain enterprise zones and focus areas and from designating or renewing certain RISE zones on or after June 1, 2020; providing for the termination on or after January 1, 2023, of the One Maryland Economic Development tax credit, the Opportunity Zone Enhancement Program, and tax credits for certain biotechnology investment, certain cybersecurity purchases, certain film production activities, and certain small businesses that provide certain employer benefits; etc.

• HB 594—Sales-and-Use Tax–Vendor Collection Credit–Job Training: SUPPORT

Authorizing certain vendors who are qualified job training organizations to claim a credit for the expense of collecting and paying the sales-and-use tax; prohibiting a vendor from claiming certain credits against the sales-and-use tax if the vendor claims a certain credit; requiring a vendor to be certified as a qualified job training organization before claiming a certain credit; authorizing a vendor to submit a certain application to the Secretary of Labor; etc.

4. Data Centers hearing—This week, the Senate Budget & Taxation Committee received testimony on SB 397, legislation that would provide a sales-and-use tax exemption for the sale of computer technology for use at a qualified data center. If passed, this legislation would level the playing field and attract data center business to Maryland, further supporting the state as a leader in innovation and investment in cyber and information technology. The hearing received tremendous support from members of the Maryland Data Centers Coalition, a group of businesses and organizations, led by the Chamber, united in support for attracting data centers to the state.

The economic impact—both direct and indirect—of data centers is substantial. According to a report by the U.S. Chamber of Commerce Technology Engagement Center, during construction, a typical data center employs roughly 1,700 workers, provides $77.7 million in wages for those workers, produces $243.5 million in output along the local economy’s supply chain and generates $9.9 million in revenue for state and local governments. Every year thereafter, the same data center supports roughly 160 local jobs, paying $7.8 million in wages, injecting $32.5 million into the local economy and generating $1.1 million in state and local revenue. [1]

However, the positive economic impact of data centers does not stop there. The incremental local taxes paid by data centers directly and indirectly support schools and law enforcement, as well as improving local public infrastructure including the expansion of broadband.

An archived webcast of the hearing can be found by clicking here. Additional information regarding data centers and their economic impact can be found here.

The House cross-file, HB 1339, will be heard in the House Ways & Means Committee on March 6.

If you or your organization wishes to be part of the Maryland Data Centers Coalition, please contact Ashley Duckman (aduckman@mdchamber.org).

5. Plastic bag ban—The Maryland General Assembly is once again considering legislation that would ban the sale of plastic bags in the state.

HB 209/SB 313, the Plastics and Packaging Reduction Act, would prohibit a store from providing a plastic bag to a consumer at the point of sale and would require a store to charge a minimum of 10 cents for paper bags. Also, the bill will pre-empt the six jurisdictions in Maryland (Takoma Park, Chestertown, Westminster, Montgomery County, Howard County and Baltimore City) that already have fees or bans on plastic bags in place, which have made compliance challenging for multijurisdictional operators.

The bill also establishes a Single-Use Products Workgroup and tasks it with making recommendations to: (1) reduce the use of single-use products, (2) reduce the environmental impact of single-use products, (3) improve statewide management of single-use products, (4) divert single-use products from disposal and landfills and (5) prevent contamination of natural resources by discarded single-use products.

If the bill is passed, Maryland would join the eight other states that presently have a plastic bag ban in place.

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[1] Tim Day and Nam D. Pham, “Data Centers: Jobs and Opportunities in Communities Nationwide,” U.S. Chamber of Commerce Technology Engagement Center, 2017, https://www.uschamber.com/sites/default/files/ctec_datacenterrpt_lowres.pdf