March 5, 2020 — A bill before Maryland’s General Assembly which would have expanded state sales tax to cover services, was unanimously rejected by a House subcommittee late Wednesday night.

Earlier in the week, NAIOP Maryland testified to the House Ways and Means Committee that House Bill 1628  could inflate commercial property construction costs, drive some CRE professionals out of state and ultimately dampen the real estate industry.

The proposed legislation, which was designed to help pay for educational improvements recommended by the Kirwan Commission, would have triggered a “pyramiding of sales taxes” in commercial construction projects, Tom Ballentine, NAIOP Maryland’s Vice President for Policy and Government Relations, testified. As drafted, the legislation would have levied tax on 50 to 60 percent of construction costs — including on the work of engineers, architects, lawyers, general contractors and specialty subcontractors — and would have increased project costs by roughly $6.50 per square foot.

The bill would have exacerbated
the already heavy taxes and fees that commercial real estate developers pay in
Maryland, Ballentine said. “In 2016, the Tax Foundation reported Maryland was
fourth in the nation in per capita collection of excise taxes. Commercial real
estate companies pay these taxes and fees at disproportionately high rates
compared to other industries and the general public.”

The Sage Policy Group
concluded that impact fees, transfer recordation and excise taxes collected by
Maryland counties increased 80 percent from 2010 to 2018.

Property management and
leasing services would also have been subject to sales tax under HB 1628,
increasing both tenant costs and CRE professionals’ operating expenses.

“The local effects will be
felt hardest in business centers adjacent to Virginia,” Ballentine told the
committee. With Bethesda just 11 miles away from Tysons Corner, “a significant
portion of the creative class that serves commercial real estate will move and
serve their Maryland clients from Virginia.”

NAIOP Maryland agrees with
the General Assembly leadership that the state’s tax structure has become
antiquated and is poorly aligned with Maryland’s economy, he said.  “The result has been that the cost of
providing government services has increasingly been embedded in the land
development entitlement process, transfer, recordation and excise taxes.… This
has hurt affordability in the multifamily sector, increased debt in the
commercial and industrial sectors and caused the state to fall short of its
economic development potential.”

In the aftermath of the
debate over HB 1628, this fundamental imbalance in the state tax structure
would be better addressed through a broader tax reform commission. Several
bills creating a tax study commission are under consideration by the Assembly.