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Understanding Combined Reporting in Maryland: 5 Top Questions Answered

Aug 27, 2021

During the 2024 Legislative Session, the business community in Maryland can expect a renewed focus on a handful of perennial issues, including Maryland’s corporate tax structure. 

One such issue is combined reporting. In the last several years, activist groups and legislators have been pushing for Maryland to adopt combined reporting for corporate income tax filings promising it will bring in more revenue for the state and close corporate tax loopholes. Each year, the Maryland Chamber of Commerce and our members continue to educate and advocate to defeat this burdensome legislation.  

I’ll dig deeper into combined reporting and its implications by answering the 5 most frequently asked questions we get on combined reporting: 

What is combined reporting?

Combined reporting is a corporate income tax reporting method where the legal existence of affiliated taxpayers (parents and subsidiaries) are disregarded and taxes are reported as if the affiliated taxpayers conducted business as a single legal entity. The separate incomes of the members/affiliated taxpayers are added together or “combined.” The determination to combine separate legal entities into one group is often based on the unitary business principle. There is no bright line “unitary” test, and states have adopted inconsistent standards.  

This system opens the door for potential issues when assigning a business’s income to different states. In theory, combined reporting should make that taxation of a group of entities comparable to the tax that would be paid if the business was conducted as a single entity. In practice, however, inherently different tax structures across states and different industries create disparate tax burdens. Combined reporting could arbitrarily allocate more income to a particular state than is justified by the level of true economic activity in that state. The converse is also true. It places a significant administrative burden because the onerous determination of the unitary group and the combined income. It is a burden that is much more detailed and complicated than Maryland’s current system or simply basing the tax liabilities on the federal consolidated return. 

How would combined reporting impact Maryland’s economy?

We have no doubt that combined reporting would have a negative impact on Maryland’s economy since its adoption may, in practice, increase effective corporate income tax rates. For example, even if its proponents were correct in arguing that combined reporting would result in an increase in net corporate tax revenue, there will be significant increases and decreases in tax liabilities for specific businesses, thereby resulting in winners and losers. 

Additionally, any resulting tax increase will ultimately be felt most by in-state consumers, who will contend with higher prices for goods and services, and by labor through fewer jobs and/or lower wages over time. Both scenarios our economy cannot afford at this time. 

Would combined reporting increase tax revenue for Maryland?

Combined reporting will not increase state tax revenue. Proponents of combined reporting contend that it will raise millions in additional tax revenue, but there is no data to support that argument. In fact, under the previous administration, Maryland’s own Business Tax Reform Commission found that instituting combined reporting “would result in a shift of the tax burden, substantial in some cases, among industries and among taxpayers, resulting in winners and losers.” Meaning who pays taxes will shift among industries without a net gain. 

Does Maryland have corporate tax loopholes that need to be closed through combined reporting?

Maryland’s Business Tax Reform Commission reported that the reasons cited in support of combined reporting have each been addressed through other legislative vehicles adopted by the General Assembly and tougher audit methods now utilized by the Comptroller’s Office.

Since 2004, the Comptroller’s Office has utilized two provisions of the State’s Tax Statute to correct perceived abuses of intercompany/interstate transactions. The first is the “add-back” provision that disallows deductions for certain expenses paid to related corporations in other states. The second are provisions granting the Comptroller discretionary powers to adjust amounts of income and expenses between related corporations.

Many states already use a combined reporting system. Why shouldn’t Maryland?

Combined reporting presents a real competitive disadvantage for Marylanders. Within the region, many of our neighboring states — including Virginia, Pennsylvania and Delaware — do not utilize the mandatory unitary combined reporting method. As a result, it would be detrimental for Maryland to employ a new taxation system that will harm the attraction and retention of businesses, and cost Marylanders access to jobs and economic opportunities.

Over the last decade, combined reporting has been exhaustively researched and debated among policymakers in Annapolis. The prevailing sentiment remains that combined reporting is not an accurate method of computing state taxable income or attributing multi-state business income to economic activity in Maryland. In fact, a combined reporting system would result in significant and unintended negative consequences for business taxpayers, including competitive disadvantage, undue complexity and administrative burden, all while resulting in no guaranteed increase to state revenue.

As the leading voice for business in the state, the Maryland Chamber of Commerce and our coalition of more than 6,800 members and federated partners, will continue to educate our elected officials on the economic burdens and inaccuracies of combined reporting.

Blog post contributed by Andrew Griffin 

Andrew Griffin is the senior vice president of government affairs at the Maryland Chamber and leads advocacy efforts on behalf of the 5,500+ members of the Chamber before the Maryland General Assembly and on a federal level. He develops, leads and executes the legislative strategy of the organization and maintains the Chamber’s positive working relationships with key elected officials and members of the administration to build a better understanding of and appreciation for business issues.