Maryland procurement regulations on use of affiliates to avoid taxation on income from state contracts.

• Position: Comments submitted Oct 15, 1997 by Tax Executives Institute to Maryland General Assembly

On October 15, 1997, Tax Executives Institute submitted the following comments to a joint committee of the Maryland General Assembly on proposed regulations relating to the tax treatment of royalty and similar deductions by companies doing business with the State of Maryland. The procurement regulations, which were issued by the Maryland Board of Public Works, would require State contractors to disclaim a deduction for royalties and similar payments to affiliated companies unless those affiliated companies reported those payments as income on a Maryland tax return. The propriety of the regulations was the subject of a October 16 hearing by the General Assembly's Joint Committee on Administrative, Executive, and Legislative Review. Following that hearing, the Joint Committee voted to recommend that the regulations be withdrawn.

On behalf of Tax Executives Institute, I am writing to voice the Institute's opposition to proposed regulations on "Procurement Methods: Contract Terms and Conditions: Use of Affiliates to Avoid Taxation on Income from State Contracts," which were issued this summer by the Board of Public Works and published in the Maryland Register on August 29, 1997. (The Joint Committee granted emergency status to the regulations on August 8, and such status is set to expire on February 8, 1998.) The proposed regulations -- COMAR 21.05.08.08, 21.07.01.026, and 21.07.03.26 -- would vitiate governing rules established for taxing enterprises doing business in the State and their affiliates, by requiring all State contractors to disclaim any right to "shift[] Maryland income to out-of-State affiliates who do not report this income to Maryland." Tax Executives Institute opposes the regulations for the following reasons:

* The regulations represent an effort by the Board of Public Works to arrogate to itself authority properly reserved to the General Assembly.

* The regulations deviate from well-established tax law principles concerning the taxation of corporate affiliates on a "separate company" basis. (Any changes to these rules should be adopted only after public debate and deliberation, not by administrative flat on an emergency basis.)

* If not withdrawn, the regulations will dampen the business climate in Maryland and impair the State's ability to attract competitive bids from vendors seeking to do business with the State.

Background

Tax Executives Institute is the professional association of corporate tax executives. Our 5,000...