Md. Code Regs. 03.04.03.08

Current through Register Vol. 51, No. 24, December 2, 2024

Section 03.04.03.08 - Apportionment of Income

A. Corporations engaged in business within and outside the State shall allocate income to reflect the amount attributable to this State.

B. Corporations operating within and outside the State as unitary businesses shall use an apportionment formula to determine the amount of income to be allocated:

(1) All of the factors of the apportionment formula shall be developed as fractions, the numerator of which shall be the total of items in this State during the tax year, and the denominator shall be the total of items everywhere during the tax year.

(2) Each factor shall be separately determined and the number of factors used shall be averaged to arrive at the final apportionment factor.

(3) The items on both numerator and denominator of each factor shall be adjusted by the applicable addition and subtraction adjustments provided under Tax-General Article, Title 10, Subtitle 3, Part II, Annotated Code of Maryland.

Example 1: In computing the net dividend item includible in the denominator of its sales factor, X Company includes the total amount of the dividends that it reported on its federal income tax return. X Company then reduces that amount by its adjustment for dividends for domestic corporations claiming foreign tax credit and by its adjustment for dividends from related foreign corporations. X Company also reduces that amount by the total amount of the special deductions that X Company reported on its federal income tax return.

Example 2: In computing the net interest item includible in the denominator of its sales factor, Y Company includes the total amount of the interest that it reported on its federal income tax return and reduces that amount by its adjustment for income from U.S. obligations.

(4) The items of both numerator and denominator shall be reconciled to the items as categorized and reported on the federal income tax return.

(5) If a return is filed by a corporation operating within and outside the State which reflects a loss with no income to be apportioned, an apportionment factor shall be calculated for the filing to be considered complete.

C. Apportionment Formula.

(1) Corporations operating as a unitary business within and outside the State shall, for tax years beginning before December 31, 2021, generally use a three-factor formula of property, payroll, and sales to determine the part of the corporation's Maryland modified income derived from or reasonably attributable to trade or business carried on in the State, as follows:

(a) For a taxable year beginning before January 1, 2018, the apportionment formula is a fraction, the numerator of which is the sum of the property factor, payroll factor, and twice the sales factor, and the denominator is four;

(b) For a taxable year beginning after December 31, 2017, but before January 1, 2019, the apportionment formula is a fraction, the numerator of which is the sum of the property factor, the payroll factor, and three times the sales factor, and the denominator of which is five;

(c) For a taxable year beginning after December 31, 2018, but before January 1, 2020, the apportionment formula is a fraction, the numerator of which is the sum of the property factor, the payroll factor, and four times the sales factor, and the denominator of which is six;

(d) For a taxable year beginning after December 31, 2019, but before January 1, 2021, the apportionment formula is a fraction, the numerator of which is the sum of the property factor, the payroll factor, and five times the sales factor, and the denominator of which is seven; and

(e) For a taxable year beginning after December 31, 2020, but before January 1, 2022, the apportionment formula is a fraction, the numerator of which is the sum of the property factor, the payroll factor, and six times the sales factor, and the denominator of which is eight.

(2) Corporations operating as unitary businesses within and outside the State shall, for a taxable year beginning after December 31, 2021, determine the part of the corporation's Maryland modified income derived from or reasonably attributable to trade or business carried on in the State by using a single sales factor apportionment formula, by multiplying its Maryland modified income by 100 percent of the sales factor.

(3) A worldwide headquartered company, as defined by Tax-General Article, § 10-402(a), Annotated Code of Maryland, may elect to calculate its Maryland modified income derived from or reasonably attributable to trade or business carried on in the State using a three-factor apportionment fraction, the numerator of which is the sum of the property factor, the payroll factor, and twice the sales factor, and the denominator of which is four.

(4) The three factors are described in §C(5)-(7) of this regulation.

(5) The sales factor includes the amounts of income reported during the taxable year as gross receipts or sales, or both (less returns and allowances), dividends and interest, gross rents and royalties, capital gains, and certain other income as follows:

(a) Gross receipts are generally sales of tangible personal property and shall be included in the numerator if the property is delivered or shipped to a purchaser within this State, regardless of f.o.b. point or other conditions of sale.

(b) Sales of property in transit destined to this State also shall be included in the numerator.

(c) Gross receipts from contracting or service-related activities shall be included in the numerator if the receipts are derived from customers within this State as determined in §D of this regulation.

(d) Gross income from intangible items such as dividends, interest, royalties, and capital gains from the sale of intangible property shall be included in the numerator based upon the average of the property and payroll factors.

(e) Gross receipts from the rental, leasing, or licensing of real or tangible personal property shall be included in the numerator if the property is located within this State.

(f) When tangible personal property is in this State for a portion of the tax year, the income received for that portion shall be included in the numerator.

(g) Capital gains from the sale of real and tangible personal property shall be included in the numerator if the property is located within this State. However, ordinary net gain or loss derived from the sale of depreciable assets shall be excluded from the factor.

(h) Other income items shall be considered separately, and the actual treatment shall be dependent upon the nature and type of each item.

(6) The property factor includes owned as well as rented tangible personal property used in the trade or business during the taxable year and shall be included in the numerator if the tangible personal property is located within this State. The following apply:

(a) The properties to which this subsection applies include:

(i) Buildings;

(ii) Equipment;

(iii) Inventory;

(iv) Land;

(v) Machinery; and

(vi) Other tangible assets.

(b) Property owned by a corporation shall be valued at its original cost and shall be reflected in the factor at the average of the tax year's beginning and ending amounts. However, if there are material changes during the tax year and the average is not a fair representation, the average shall be calculated on a monthly or daily basis.

(c) Property in transit shall be considered to be at its destination for purposes of the factor.

(d) Property under construction during the tax year shall be excluded from the factor until actually placed in service.

(e) Property leased or rented by the corporation shall be included in the factor at a capitalized value as follows:

(i) The expense associated with the privilege of occupying or using the property, including such items as fixed rent, percentage rent, real estate taxes, insurance, and maintenance, shall be multiplied by eight to arrive at the capitalized value;

(ii) Expenses such as gas, electricity, oil, water, or other items normally consumed shall be excluded.

(f) Improvements to the leased or rented property which revert to the owner at the expiration of the lease or rental term shall be amortized and not capitalized. The following apply:

(i) The actual cost of the improvements shall be divided by the number of years remaining for the term of the lease; and

(ii) The result shall be included in the factor for each tax year.

(g) Sublease income shall be included in the sales factor and not used to reduce rental expense.

(h) Nonrental or below market rate rental shall be adjusted to reflect a reasonable market rental rate and then capitalized as provided in §C(6)(e)(i) of this regulation.

(i) Property that has remained idle and has not produced any revenue for a period of 5 or more years may not be included in the property factor.

(7) The payroll factor shall be the amount of compensation paid during the taxable year, as follows:

(a) Compensation is included in the numerator if:

(i) The individual's service is performed entirely within this State, or

(ii) The individual's service is performed both within and without this State but the service performed without this State is incidental to the individual's service within this State;

(b) Compensation is also included in the numerator if:

(i) Some part of the service is performed within this State,

(ii) The base of operations or place from which the service is controlled is not in any state where the service is performed, and

(iii) The individual's residence is in this State.

D. Customers Within this State.

(1) "Customers within this State" shall be determined as provided in this section.

(2) Domicile.

(a) Individuals. Except as provided in this section, a customer to whom a service is provided shall be considered a customer within this State if the customer is an individual domiciled in this State.

Example 1: An attorney, a partner in law firm A located in the District of Columbia, renders legal advice to a domiciliary of Maryland. Assuming sufficient nexus between the law firm and Maryland so as to require the filing of a Maryland income tax return, the fee earned from the service rendered to the Maryland domiciliary is included in the numerator of A's sales factor.

Example 2: An accountant B, whose firm is located within Maryland, performs accounting services for a resident of Pennsylvania. The fee earned from these services is not included in the numerator of B's sales factor.

(b) Business Enterprises.

(i) "Business enterprise" includes a proprietorship, partnership, limited liability partnership, corporation, limited liability company, and any other entity, regardless of how structured or denominated, that is engaged in business.

(ii) A business enterprise shall be considered a customer within this State if the business enterprise is domiciled in this State.

(iii) If the customer is a business enterprise, then the domicile is the state in which is located the office or place of business that provides the principal impetus for the sale. If an office or place of business cannot be identified as providing the principal impetus for the sale, then the domicile shall be the state in which the headquarters or principal place of business management of the customer is located.

Example 2-1: X Company, a subsidiary corporation located in Maryland, administers medical plans on behalf of its parent corporation, which is located in Tennessee. X Company administers these medical plans for individuals that are domiciled in Maryland. The fees paid for these administration services are included in the numerator of X Company's sales factor. This example illustrates that the ultimate customer is determined by the domicile of the individual/business enterprise actually receiving the service.

Example 3: Service provider C contracts with corporation D, an enterprise operating within and outside the State, to redesign the operating software for D's customer billing operation. The principal impetus for this contract is to provide a benefit to the central billing computers. If those computers are located within Maryland, then the revenue earned from these services is included in the numerator of C's sales factor.

Example 4: Service provider E contracts with corporation F, an enterprise operating within and outside the State, to redesign all the operating software of F's multistate computer network. If no particular office or place of business can be identified as the principal impetus for this contract, then the revenue earned from this contract shall be included in the numerator of E's sales factor only if F's headquarters or principal place of business management is located within Maryland.

(3) Services Related to Real Property. If a person provides a service relating to construction or improvement to real property, then whether the customer is a customer within this State will be determined by the situs of the property.

Example 5: An architect contracts with a nonresident of this State to design a shopping center in this State. The architect shall include in the numerator of the sales factor all revenue received from the customer.

Example 6: A contractor contracts with a resident of Maryland to construct an apartment complex outside of this State. The contractor does not include in the numerator of the sales factor the revenue received from the customer.

(4) Brokerage Services. Receipts derived from securities brokerages services allocable to this State are determined by multiplying the total dollar amount of sales of securities brokerage services by a fraction, the numerator of which is the receipts from securities brokerage services from customers domiciled in this State and the denominator of which is the receipts from securities brokerage services from all customers. Receipts from securities brokerage services include commissions on transactions, the spread earned on principal transactions in which the broker buys or sells from its account, total margin interest paid on behalf of brokerage accounts owned by the broker's customers, and fees and receipts of all kinds from the underwriting of securities. For principal transactions that are part of brokerage receipts, if the income from these transactions can be tied to, or associated with, an identifiable customer that provides the impetus for the transaction, the receipt shall be assigned to the domicile of that customer. If it is impossible to identify or associate a specific customer with a receipt, the receipt shall be excluded from both the numerator and the denominator of the receipts factor. If receipts from brokerage services can be associated with a particular customer, but it is impractical to associate the receipts with the address of the customer, the customer shall be presumed to have a domicile at the branch office that generates transactions for the customer.

Example 7: Broker A executes a transaction on a stock exchange for Customer B, a Maryland domiciliary, selling 100 shares of Corporation X for $1,000 and earning a $50 commission on the transaction. The commission is included in the numerator of A's sales factor.

Example 8: Broker C executes a transaction for Customer E, a domiciliary of Maryland, whereby C sells to E securities from its own account. Broker C's purchase cost is $1,000 and sales price is $1,025. The spread of $25 is included in the numerator of C's sales factor. This example illustrates two principles. First, only net proceeds, not gross proceeds, from principal transactions in which the broker sells from its own account are included in the sales factor. Second, the net amount is included in the sales factor numerator because Customer E, a domiciliary of Maryland, is the principle impetus for the transaction.

(5) Services to Regulated Investment Companies.

(a) Receipts from services that are derived directly or indirectly from the sale of management, distribution, administration, or securities brokerages services to, or on behalf of, a regulated investment company or its beneficial owners (including receipts derived directly or indirectly from trustees, sponsors, or participants of employee benefit plans that have accounts in a regulated investment company) shall be allocated to this State to the extent that shareholders of the regulated investment company are domiciled in this State. A separate computation shall be made with respect to the receipts derived from each regulated investment company. The total amount of receipts derived from each regulated investment company which are allocable to this State shall be equal to the total receipts so derived multiplied by a fraction:

(i) The numerator of which is the average of the sum of the beginning-of-the-year and end-of-the-year number of shares owned by the regulated investment company share-holders domiciled in this State; and

(ii) The denominator of which is the average of the sum of the beginning-of-the-year and end-of-the-year number of shares owned by all shareholders.

(b) For purposes of the fraction, the year shall be the taxable year of the regulated investment company that ends with or within the taxable year of the taxpayer.

(c) "Domicile" means the shareholder's mailing address on the records of the regulated investment company. If the regulated investment company or the person providing management services to the regulated investment company has actual knowledge that the shareholder's primary residence or principal place of business is different than the shareholder's mailing address, then the shareholder's primary residence or principal place of business is the shareholder's domicile. If the shareholder's address is not known or determinable and it is impracticable to obtain this information, then the domicile of the shareholder will be the location or domicile of the business entity that provides the impetus for the transaction.

Example 9: Mutual Fund X is an investment option in a § 401(k) plan sponsored by Company Z located and domiciled in Ohio, but the mutual fund does not maintain addresses of the plan participants. The "customer" and associated receipts would be domiciled in Ohio. If the Mutual Fund does maintain addresses of the plan participants, the "customer" and associated receipts would be assigned to Maryland if the address of the plan participant is in Maryland.

(6) Broadcast and Print Media. All revenue, including advertising receipts, derived from print and broadcast media shall be included in the numerator of the sales factor based on a reasonable estimate of the Maryland component of the audience for the broadcaster or publisher. In the case of print media, audience shall be measured by circulation.

Example 10: A radio station in the District of Columbia regularly solicits business in Maryland and broadcasts its signal into Maryland. The station subscribes to a ratings service that enables it to demonstrate to its advertisers the location, size, and demographics of its listening audience. The percentage of the audience that represents the Maryland component of the total audience is applied to total revenue to determine the Maryland sales.

Example 11: A newspaper is engaged in business in both Maryland and the District of Columbia. The amount of its total revenue to be included in the Maryland sales factor numerator is determined based on the newspaper's circulation. The percentage of total circulation attributable to Maryland is applied to total revenue to determine the Maryland sales.

(7) Processing or Similar Services to Business Customers. If a business enterprise provides processing or similar services to a customer having a location in more than one state, then the business enterprise's customers within this State are determined by the point of sale between the ultimate consumer and the business enterprise's customer.

Example 12: A credit card processing company contracts with a major retailer operating within and outside the State. The processor shall include in the numerator of its sales factor all revenue received from the retailer derived from sales by the retailer in this State.

E. Other Apportionment Methods.

(1) A corporation engaged primarily in leasing or rental operations shall use an equally weighted two-factor formula of receipts and property, except that receipts from intangible items shall be excluded.

(2) Corporations engaged primarily in certain types of transportation shall use a one-factor formula as described below to determine the amount of income allocable to this State:

(a) Trucks (Motorfreight Carriers). Number of miles traveled on roads in-State compared to the number of miles traveled on roads everywhere.

(b) Railroads. Number of miles traveled on tracks in-State compared to the number of miles traveled on tracks everywhere.

(c) Ships. Number of days spent in ports and on waterways in-State compared to the number of days spent in ports and on waterways everywhere.

F. Special Rules.

(1) If an apportionment formula does not fairly represent the extent of a corporation's activity in this State, the Comptroller may alter the formula or its components.

(2) A corporation's share of partnership or joint venture receipts, property, and wages shall be included in the apportionment formula:

(a) To the extent of the factors required; and

(b) In the same manner as if they were direct receipts, property, and wages of the corporation.

(3) Separate accounting may be allowed only if:

(a) It is practicable; and

(b) The activity of the corporation within this State is nonunitary.

G. Airline Industry.

(1) In this section, the following terms have the meanings indicated:

(a) "Departures" means all takeoffs, whether scheduled or nonscheduled flights, that occur during revenue service.

(b) "Flight equipment" means aircraft and their integral components.

(c) Originating Passengers.

(i) "Originating passengers" means passengers first received in air travel as reported on the Department of Transportation "Passenger Origin and Destination Survey Report."

(ii) "Originating passengers" does not include enplanements occurring on flight changes en route.

(d) "Originating tons" means loaded or short tons (2,000 pounds) of cargo at the beginning of a flight.

(e) "Value" means the original cost of real property or tangible personal property and, in the case of rented or leased property, value means eight times the net annual rental or lease expense.

(2) Corporations engaged primarily in the airline industry shall use a three-factor formula of sales, property, and payroll to determine the amount of income allocable to this State.

(3) Sales Factor.

(a) The numerator of the sales factor is the sum of the passenger revenue and freight revenue allocable to this State for the taxable year. Passenger revenue is computed by multiplying passenger revenue everywhere by the ratio of the number of originating passengers in Maryland compared to the number of originating passengers everywhere. Freight revenue is computed by multiplying freight revenue everywhere by the ratio of originating tons in this State compared to originating tons everywhere.

(b) The denominator of the sales factor is the sum of passenger revenue everywhere plus freight revenue everywhere.

(4) Property Factor.

(a) The numerator of the property factor is the sum of the average value of real property and tangible personal property owned, rented, and used in this State during the taxable year plus the value of flight equipment allocable to this State. The allocation of the value of flight equipment is determined by the following:

(i) 50 percent times the air miles in this State over the air miles everywhere times the value of flight equipment everywhere; plus

(ii) 50 percent times the departures from this State over the departures everywhere times the value of flight equipment everywhere.

(b) The denominator of the property factor is the sum of the average value of all real property and tangible personal property owned and rented everywhere, including the value of all flight equipment.

(5) Payroll Factor.

(a) The numerator of the payroll factor is the total amount paid as compensation for services performed in this State plus flight crew compensation allocable to this State. The allocation of flight crew compensation allocable to this State is determined by the following:

(i) 50 percent times the air miles in this State over the air miles everywhere times flight crew compensation everywhere; plus

(ii) 50 percent times the departures from this State over the departures everywhere times flight crew compensation everywhere.

(b) The denominator of the payroll factor is the total payroll everywhere for the taxable year.

(6) The final apportionment factor is arrived at by averaging the sum of the separately computed sales, property, and payroll factors.

Md. Code Regs. 03.04.03.08

Regulation .08 amended effective January 1, 1998 (24:26 Md. R. 1754)
Regulation .08B amended effective October 9, 2006 (33:20 Md. R. 1612)
Regulation .08C amended effective October 12, 1992 (19:20 Md. R. 1813); October 9, 2006 (33:20 Md. R. 1612)
Regulation .08D amended effective October 9, 2006 (33:20 Md. R. 1612)
Regulation .08G adopted effective October 9, 2006 (33:20 Md. R. 1612); amended effective 49:9 Md. R. 529, eff. 5/2/2022