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By Altus Group | April 8, 2015

Maryland’s Governor, Larry Hogan, planned on giving a modest tax break to some small businesses in the state. The result thus far is the Maryland Senate unanimously approving last week a bill that could force tens of thousands of Maryland companies to undergo personal property tax audits. Although Hogan’s office was aware of the audit provision, they did not realize the effect, saying they had heard it to be an audit of the state’s process, not of the individual taxpayers.

Maryland businesses pay personal property tax annually on their assets such as furniture, computers, and other equipment. Hogan sought to let firms with less than $10,000 in property avoid the costly process of doing an annual inventory and filing paperwork, only to be assessed a small tax. Legislative analysts estimate about 75,000 businesses in the state have property worth less than $10,000 and their average tax break would be $72 a year.

Tax Management Associates, Inc., (TMA) the outside firm that lobbied the legislators about the audit idea, says that the approach to auditing in Maryland will be to run a computer analysis on 80% of the state’s businesses and review the top 20% of the highest grossing revenue for the state. More aggressive audits would involve sit downs with owners, site visits and reviews of account books and tax filings.

TMA estimates that auditing 25,604 of Maryland’s bigger companies would generate $118 million in unpaid taxes and penalties. This is in addition to local governments netting the combined $597 million that they collected last year.

Practitioners are skeptical about both the audit process and the predicted tax revenue gain.  Jim Francis, Vice President of Altus State & Local Tax and Advisory in Sparks, MD, was a member of the work group established by the legislature last year and that studied the audit idea, including in presentations to the group made by TMA. Francis says “The work group talked about the issue of audits quite a bit.  The work group recommended that the Department of Assessments & Taxation consider adding internal staff to perform these audits while performing a pilot program using outside auditors to determine if the cost to conduct these audits was justified. I foresee a lot of hours being spent by the outside auditors, the taxpayers and their accountants and legal counsel, and the Department on these audits.  I wonder if the actual results will be worth the time and costs.”

According to Section 2 of the Senate Bill, The Department of Assessments and Taxation will be required to contract with a public or private entity to audit the assessed value of business personal property. A report on the findings will be submitted to the General Assembly. The Governor must include sufficient funds in the State budget to cover the audit costs, not to exceed $5 million.

If the Board of Public Works does not approve the procurement contract required under Section 2 on or before April 16, 2016, the Hogan tax break will be repealed.

The proposal is now up for consideration in the House of Delegates.

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