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From: Andrew Langer, President, Institute for Liberty

To: Interested Parties
Date: April 18, 2018

Re: Why MD SB 1090 (2018) is Bad Legislation


On April 9, 2018, the Maryland legislature passed SB 1090, a bill whose express purpose is to change
the reporting requirements for corporations based outside the state of Maryland who sell goods and
services within the state of Maryland, so that the manner in which the tax liability for these companies is
calculated shifts from a three-pronged calculation (property, payroll, and sales) to what they call a
“single sales factor” calculation, taxing only the sales within a state.

This legislation is bad law—bad for these companies, bad for thousands of medium and small businesses
based in Maryland, and bad for Maryland’s working families.


The three-factor method was, for many years, considered the gold standard for out-of-state corporation
tax calculation. In fact, the US Supreme Court called it the “benchmark” against which other formulas
for such calculations ought to be measured1. Nevertheless, in recent years, there has been a movement
(especially in states under Democrat control) to shift the formula from the three-factor method to the
single sales factor.

It is a way for a state to raise taxes on those who do business within a state but who are not incorporated
within that state, so that the state can gain more revenue without directly hurting the state’s residents or
the businesses incorporated wholly within the state.

The problem with that reasoning is two-fold. First, as we know, corporate taxes aren’t really paid by
corporations… they’re paid by consumers—and for the purposes of SB 1090, in this case, Maryland’s
working families and the state’s Main Street businesses that rely on these out-of-state companies. And
there are serious constitutional implications for creating tax structures that treat businesses disparately.

With regards to those constitutional implications—while the Supreme Court has ruled that states have
“wide authority” to figure out how to tax out-of-state companies, those formulas have to be fairly
apportioned—limited to the net income that is, as the high court said, “fairly attributable” to what that
business’ activity is within a particular state2.

Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983)

Allied Signal Inc. v. Dir., N.J. Division of Taxation, 504 U.S. 768 (1992)
As Cara Griffith wrote in an article for Forbes in 2014:

“The problem with single-sales-factor apportionment is that it is questionable whether the

formula presents an accurate depiction of a company’s activity in a state. A strong
argument can be made that the sales factor is a poor indicator of a company’s activity and
should be minimized and that property and payroll would be better indicators.”3

The problem is amplified from a fairness perspective if such treatment is limited only to companies that
are based out-of-state.

Bad for Business and Maryland’s Working Families

From a consumer perspective, the problem is that companies inevitably pass tax increases onto
consumers. And keep in mind—consumers aren’t just individual consumers, consumers are also those
Maryland-based companies that buy products from companies based out of state.

So this hurts working families in two ways as well: working families are the least-able to handle price
increases on goods that are necessary (consider, for instance, working families in Maryland’s border
counties who might be hit harder with increased prices for foodstuffs produced just outside of the state
but sold within Maryland); but also small businesses that have their ability to hire impacted by increased
prices for the products they sell.

The Hogan administration has engaged in sweeping reforms to reduce regulatory burdens on Maryland’s
small businesses—this is a central element of Governor Hogan’s “Maryland is Open For Business”
initiative, and Kelly Schulz, the Secretary for Maryland’s Department of Labor, Licensing and
Regulation has done tremendous work in ensuring that these reforms are implemented. Moreover,
Comptroller Peter Franchot has implemented a number of strong reforms aimed at making it easier for
Maryland’s entrepreneurs to make their small business dreams real. In the last three years, despite the
best efforts of the Maryland Legislature, the state has been seeing tremendous prosperity—SB 1090 will
blunt those efforts.


Marylanders already pay some of the highest taxes in the country. They saw a tremendous amount of
relief, $1700 on average, from the federal tax reform bill passed late last year4. Maryland’s Democrats
claim that they want a tax system that is fair to all and benefits the state’s working families especially.

SB 1090 does neither. It is bad policy and will hurt small businesses and working families.