Maryland: Partners Required to Use Single-Sales Factor Manufacturing Formula

Listen to a brief overview of state tax developments this week, including Maryland, or read full Maryland development below.

Detailed Maryland Development

In an unreported opinion, the Maryland Court of Special Appeals held that the Comptroller had the authority to require a group of related corporations to use the single sales factor apportionment formula applicable to manufacturing corporations. The taxpayers at issue, related corporations organized outside of Maryland, each owned less than 20 percent of a limited partnership. The limited partnership’s primary business was designing, manufacturing, distributing, and selling medical devices. However, the partnership did not conduct any manufacturing activities in Maryland; rather, it sold medical devices, supplies, and other healthcare-related products to Maryland consumers. On their original returns, the taxpayers applied the three-factor double-weighed sales formula. On audit, the Comptroller, without reference to a particular statute, determined that the single sales factor apportionment method applicable to manufacturing corporations should be applied.

Maryland’s alternative apportionment statute allows the Comptroller to alter the apportionment method to clearly reflect income allocable to Maryland. On appeal from their final assessments, the taxpayers argued that the Comptroller had no authority to require single-sales factor apportionment because the taxpayers did not meet the requirements of a “manufacturing corporation.” In the court’s view, both the statute and the corresponding regulation placed the analysis of the circumstances that could possibly alter the tax formula firmly in the purview of the Comptroller. “There are no limitations provided for these circumstances.” Because the Maryland courts had not yet interpreted the key language of the statute allowing for an alternative apportionment formula, the court relied on the U.S. Supreme Court’s interpretation of a federal statute that allowed the Commissioner to alter an accounting method if it did not clearly reflect income. Based on that decision, the court concluded Comptroller’s decision was entitled to a more than a usual presumption of correctness. Once the Comptroller has selected an alternative method, the taxpayer bears the heavy burden of establishing that the alteration was unfair. Without analyzing why the statutory method did not fairly reflect income allocable to Maryland or whether the single-sales method was more appropriate than another alternative method, the court concluded that the tax court was legally correct in selecting the single-sales method. For more information on Lafayette Pharmaceuticals Inc. please contact Daniel McGuire.

This Week's Developments

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Featured Speaker

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US