Sec. 03.04.03.10. Apportionment of Income—Single Sales Factor Apportionment for Manufacturing Corporations

A. Scope. This regulation provides specific guidelines for manufacturing corporations subject to the Maryland income tax laws.

B. In this regulation, the following terms have the meanings indicated:

(1) Manufacturing Corporation.

(a) "Manufacturing corporation" means a domestic or foreign corporation that is primarily engaged in activities that, in accordance with the North American Industrial Classification System, would be included in sector 11, 31, 32, or 33.

(b) "Manufacturing corporation" does not include:

(i) A refiner, as defined in Business Regulation Article, §10-101, Annotated Code of Maryland;

(ii) An affiliated or commonly controlled corporation that engages in activities on behalf of a manufacturing corporation, either directly or indirectly; or

(iii) An affiliated or unaffiliated service provider.

(2) "North American Industrial Classification System (NAICS)" means the North American Industrial Classification System, United States Manual, United States Office of Management and Budget, 1997 Edition.

C. Classification as a Manufacturing Corporation.

(1) To be classified as a manufacturing corporation, the requisite activities of the NAICS code shall be performed directly by the entity using the one-factor formula. While it is not required that entities using the one-factor formula perform all elements of a vertically integrated manufacturing process, it is required that the activities leading to their classification as a manufacturing corporation be performed by the corporation, and not by related or unrelated entities.

(2) Examples.

(a) The operation of the criteria in §C (1) of this regulation is shown by §C (2) (b)-(d) of this regulation.

(b) X Company sells goods that are manufactured under cost plus contracts and service agreements by affiliated subsidiaries and unaffiliated companies. X Company's only activities are related to storage and transportation of goods, sales, and general headquarters management. X Company is not a manufacturing corporation within the meaning of this regulation.

(c) Y Company sells motorcycles produced from parts such as engines, frames, and gears that it purchases from a variety of affiliated and unaffiliated suppliers. It assembles these parts into finished products for resale using its own employees to do so. Y Company is a manufacturing corporation within the meaning of this regulation.

(d) Z Company manufactures, sells, and installs custom and off-the-shelf cabinets. Z Company is a manufacturing corporation within the meaning of this regulation. C Contractor purchases custom and off-the-shelf cabinets for its customers and installs the cabinets in its customers' homes. Although C Contractor may assemble the off-the-shelf cabinets and install them, C Contractor is not a manufacturing corporation within the meaning of this regulation.

D. Primarily Engaged.

(1) A manufacturing corporation is primarily engaged in activities that would be included in NAICS sector 11, 31, 32, or 33 if:

(a) More than 50 percent of the corporation's sales are derived from activities from one or more of these sectors; and

(b) Line 1c of the corporation's federal income tax return (sales) are more than 50 percent of line 11 of the corporation's federal income tax return (total income).

(2) Sales, as determined under this section, include all of the corporation's gross receipts or sales, less returns and allowances, as reported on line 1c of the corporation's federal income tax return.

(3) The sales factor of a company using a one-factor formula as required by this regulation is determined as follows:

(a) Sales of tangible personal property shall be allocated to the numerator or denominator of the factor by the same methods and rules applied in COMAR 03.04.03.08C(3)(a) and (b);

(b) Gross receipts from the rental, leasing, or licensing of real or tangible personal property shall be allocated to the numerator or the denominator by the same methods and rules applied in COMAR 03.04.03.08C(3)(e) and (f);

(c) Service income shall be allocated to the numerator or denominator by the same methods and rules applied in COMAR 03.04.03.08C(3)(c);

(d) Gross receipts from intangible items such as interest, royalties, capital gains, including capital gains from sales of tangible personal property, and ordinary gains and losses shall be excluded from the numerator and denominator; and

(e) Other income items shall be considered separately and the actual treatment shall be dependent upon the nature and type of each item.

E. Apportionment Method. If a manufacturing corporation carries on its trade or business within and outside of the State and the trade or business is a unitary business, the part of the corporation's Maryland modified income derived from or reasonably attributable to trade or business carried on in the State shall be determined using a single sales factor apportionment formula, by multiplying its Maryland modified income by 100 percent of the sales factor.

F. Tax Return Reporting.

(1) NAICS Code.

(a) In filing its tax return for each year, a manufacturing corporation shall certify that the NAICS code reported on its Maryland tax return is consistent with that reported to other government agencies and accurately reflects the primary activities of the corporation.

(b) If the Comptroller determines that a corporation has submitted information that incorrectly classifies the corporation as a manufacturing corporation, the Comptroller shall reclassify the corporation in an appropriate manner.

(2) For each taxable year beginning after December 31, 2005, but before January 1, 2011, a manufacturing corporation that has more than 25 employees and apportions its income under this regulation shall attach to its Maryland tax return a report containing the following information as of the last day of the taxable year:

(a) The difference in tax owed as a result of using the single sales factor apportionment method under this regulation as compared to the tax owed using the three-factor, double-weighted sales factor apportionment method as set forth in COMAR 03.04.03.08, in effect for the last taxable year beginning on or before December 31, 2000;

(b) The volume of sales in the State and worldwide;

(c) The taxable income in the State and worldwide; and

(d) The book value of plant, land, and equipment in the State and worldwide.