Legislative / Regulatory | Tax | Taxation

MACPA testifies as tax legislation advances

Jeff Lawson, incoming chair of the MACPA's State Tax Committee, testified at a hearing last week on a bill that would increase the interest rate paid on Wynne tax refunds to equate the rate paid on all other general tax refunds. Several other tax bills recently advanced in the Maryland General Assembly, including the Taxpayer Protection Act, spearheaded by Comptroller Peter Franchot, which would give the Comptroller’s office and other offices additional powers to investigate and prosecute individuals and firms committing tax preparation fraud, a phenomenon that is proliferating, fueled by cybercrime and identity theft.

Wynne Interest Rate Debate Centers on Fairness, Fiscal Issues 

Fairness and fiscal issues were the focus of debate at a Senate Budget and Taxation Committee hearing last week on Senate Bill 1024: Income Tax – Interest Rate – Wynne Case. The bill concerns the interest rate paid on refunds issued by the State of Maryland (and in turn, reimbursed by Counties to the State) arising from the U.S. Supreme Court decision on the ‘Wynne’ case (Comptroller of the Treasury v. Wynne, Opinion 13-485) in which the Supreme Court ruled that a component of Maryland’s personal income tax structure is unconstitutional because it results in double taxation of income earned outside of Maryland and thus violates the Commerce Clause of the U.S. Constitution. 

Under current law (established in Section 16 of Chapter 464 of the Acts of the General Assembly of 2014), the Comptroller sets the interest rate on refunds paid to taxpayers under the Wynne decision at a rate based on the prime lending rate. The resulting interest rate for Wynne tax refunds – currently approximately 3% according to testimony at the hearing -is significantly less than the 13% interest rate paid by the State on general tax refunds, and charged by the State on delinquent taxes. Following protests against the lower interest rate, including a class action lawsuit filed in Circuit Court against the State of Maryland, the Comptroller’s office sent letters to recipients of Wynne tax refunds outlining a procedure to formally file protests against the lower rate received (for further detail, see our recent guest post by Karen Syrylo, Wynne Refunds: What Maryland Taxpayers Need to Know

Sen. Serafini Sponsors Legislation

SB 1024, sponsored by Sen. Andrew Serafini, would address the fairness issue and attempt to head off further litigation against the State by repealing the special interest rate provisions for Wynne refunds set forth in Section 16 of Chapter 464 of the Maryland Tax Code and instead require the same interest rate to be paid on Wynne refunds as the rate paid on all other general tax refunds (and charged on delinquent taxes due).The new language provided in SB 1024 would require the State to pay a further refund to any taxpayer who received a refund under the Wynne decision, by paying those taxpayers an additional amount equal to the difference between the general interest rate on tax refunds (set forth in Section 13-604 of the Tax Code), and the rate that was paid on the Wynne tax refund.

Contrasting the interest rate paid on other tax refunds and charged to delinquent taxpayers, with the special rate established for Wynne tax refunds, Serafini noted, “We are still paying people back when we make a mistake [at] 13 [percent], we are still charging them 13 [percent], except for in the Wynne case.” He explained, SB 1024 is a bill that establishes that tax refunds as a result of the Comptroller vs. Wynne case should be paid at the same 13% [interest rate] that we are paying to people now.” 

Serafini acknowledged opposition to the bill on the basis of funding concerns, particularly at the county level, where Wynne refunds would originate. However, he noted the significance of the legal challenge to the Wynne interest rate. “The class action suit is based on Constitutional clauses from the 5th and 14th Amendments,” he said, which address, “‘nor shall private property be taken for public use without just compensation,’ and ‘no state shall make or enforce any law which shall deny to any person within its jurisdiction the equal protection of the laws.’”

Counties Concerned If Higher Interest Rate Required

Referencing the fiscal and policy note outlining the potential increased cost/ decreased revenue to the counties and the State relating solely to this change in interest rate (estimated as a one-time expenditure to the state in FY 2017, and a decrease in total tax revenues to the counties of $50 million a year) Serafini said, “I understand the fiscal note; I understand the reality of the situation, I think it is just a question of fair treatment under the law.”

Offering opposing testimony was Michael Sanderson, Executive Director of the Maryland Association of Counties. “Obviously, the fiscal note is of real consequence, a centerpiece of our worry about the bill that’s before you,” said Sanderson. “We are in the business of paving roads and all the things that county governments do,” he stated, adding, “I want to take at least a stab at the policy that’s in this bill.

“With due respect to the supporters [of the bill] and the fairness issue,” noted Sanderson, “I think there is a legitimate other side to that story.” He explained that the charging of interest serves several different functions in circumstances such as tax refunds. “There’s compensatory interest, and punitive interest,” he continued, adding, “the reason you charge a ‘super’ [above] market rate - no one gets 13% in the marketplace today, that’s obviously a super high rate designed to change people’s behavior - you have folks who are not paying their taxes on time, we want to encourage them to pay, you charge a high rate to bring them to do so.” In a parallel way, as explained by Sanderson, “You have a high rate on the government to issue a refund, to make sure the bureaucracy moves along, that you don’t have folks’ checks sitting in the mail   [but] once there is a resolution, you should say, get it out the door, and make sure the bureaucracy is working properly.. That’s why you have a high [interest] rate to make sure the county government or state government takes care of the citizen correctly once there’s a resolution, That’s a principle that makes plenty of sense.”

However, added Sanderson, “What’s before you, with the Wynne decision, and the reason the General Assembly judged this was different, is this doesn’t fit that fact pattern; you had years of folks filing a return, the Comptroller administering the law exactly as you all had written it, and it was a new legal theory that finally got resolved years after the fact. The idea of folks going back 3, 5, 7 years to gain 13% interest, punitive interest, for all that time, [when] the Comptroller was doing his job, the staff were doing their jobs, no one’s complaining they are sitting on the refund checks now; no one’s complaining that they’re doing it unfairly; that’s the policy argument why to compensate those folks reasonably: 3% is a better return than some other places; what you picked was effectively the prime rate, that is a reasonable rate; as opposed to punishing the government as a bad actor, we got caught on a legal theory no one had ever heard of.”

MACPA's Lawson: Court Case, Costly Consequences If Bill Isn't Passed

Facing off against the backdrop of fairness vs. fiscal arguments was Jeff Lawson, CPA, of Baltimore-based Stoy, Malone and Company, incoming chair of MACPA’s State Taxation Committee, testifying on behalf of the MACPA, in support of SB 1024. Lawson laid out the arguments, illustrating potential negative fiscal consequences if the bill is not adopted, due to additive expenditures that would be required to mount a fight against continued court challenges that have already been directed against the Wynne interest rate.

Noting that he represents many business owners from small and large companies, Lawson testified on the inconsistency in current policy, “As the Senator pointed out, the bill that this intends to repeal is unfair: we have 13% [interest rate] paid to 99% of those who get a refund, this 1% is isolated.”

In terms of practical implications if the Wynne interest rate is left as is, Lawson cautioned, “Besides the class action suit that’s been filed, there is also likely to be other litigation forthcoming.” He explained the ramifications of this include, “there could be costs to all Maryland taxpayers, in terms of defending that litigation, based on a court case that has already been ruled by the U.S. Supreme Court to be unconstitutional to the Wynne’s.”

The appeal process is also burdensome to taxpayers, taking up time and resources away from other business activities, explained Lawson. “What we have seen as a small firm,” he continued, “is that we have several dozen clients impacted by this, and the way taxpayers have to appeal this right now, because it is going to be litigated, taxpayers receive a refund , then they receive  a letter from the Comptroller’s office advising them of their appeal rights, so for each year for which they receive a refund, the burden is on the taxpayer to either do this themselves, or pay our fees to calculate the correct amount of interest, and oftentimes we see interest being paid isn’t being calculated correctly, so that adds a further burden. Then, there is an appeal filed for each year, putting more of a burden on the State Comptroller’s office, which already has limited resources, there again using state resources for a provision that is already unfair.” Lawson concluded, “With this said, I ask that you give SB 1024 a favorable report.”

Chamber: It's About the Interest - And the Principle

Also testifying in support of SB 1024 was PJ Hogan of Cornerstone Government Affairs on behalf of the Maryland Chamber of Commerce. “I am the other supporter of this bill, for all the reasons you have already heard,” said Hogan. 

Members of the Senate Committee and observers took note when he added, “The [Maryland] Chamber of Commerce does support the bill…it is about the principle here, not just the interest, but the principle.”

Taxpayer Protection Act Advances

In other tax-related news, Comptroller Peter Franchot’s Taxpayer Protection Act (House Bill 162), designed to supply additional powers to investigate and prosecute fraudulent tax preparers, passed the House of Delegates yesterday by a vote of 135-1. 

The bill has now advanced to a first reading in two Senate Committees: Judicial Proceedings, and Budget and Taxation. 

The House bill, as amended, includes an amendment supported by the MACPA to exempt small businesses with fewer than 10 employees from being required to supply electronically filed W-2s, and permit paper filing of W-2s by those businesses. Read more in our summary of an earlier House Judiciary Committee hearing, including testimony by MACPA CEO Tom Hood and MACPA members Skip Coale and David Goldner. 

Bill Advances to Align State, Federal Due Dates for Corporate Returns 

A bill introduced to align the due date for Maryland Corporate tax returns for C-Corps with the new (later) date recently instituted for federal C-Corp returns, SB 288, Income Tax-Corporation Returns-Filing Date, advanced with a 47-0 vote in the State Senate. A hearing has been called by the House Ways and Means Committee for March 29.

The MACPA testified in favor of this bill, which would move the Maryland due date for C-Corp returns to the 15th day of the 4th month of the fiscal year, from the 15th day of the third month, aligning with the new federal due dates established by the IRS for C-Corp returns effective for the 2016 tax year (returns filed in 2017).

Augustine Bills Advance

Two bills emanating from recommendations of the Maryland Economic Development and Business Climate Commission, better known as the Augustine Commission for its Chair, retired Lockheed Martin CEO Norman Augustine, have advanced. SB 840, Income Tax - Rates, Personal Exemptions, and Earned Income Tax Credit passed the State Senate by a 37-8 vote, and moves onto the Ways and Means Committee in the House of Delegates.SB 843, Tax Credits-Evaluations and Sunset Provisions, passed the State Senate by a vote of 45-0, and also moves onto the House Ways and Means Committee