DC Metropolitan Business Law Alert - Updates on Important Legal Developments that Impact the Business Community in DC, Md and Va.

The Maryland Senate’s passage of the widely debated and publicized Budget and Taxation bill effectively eliminates a long-used approach to avoid the current payment of mortgage recordation taxes on a commercial real estate loan. Rather than providing a direct deed of trust on the real estate to secure the loan, the property owner would create a related entity to act as borrower (usually a wholly owned subsidiary) and the property owner would guaranty the loan, securing the guaranty with an indemnity deed of trust (an “IDOT”). Under existing law, there is no current recordation tax on the IDOT.  Effective July 1, 2012, Maryland’s recordation tax law will apply to IDOTs (except in the case of an IDOT securing a loan of less than $1,000,000 or to the extent recordation tax is paid on another instrument securing such loan).  We expect this amendment to the recordation tax law to end the general use of IDOTs in Maryland, thereby increasing the cost of financing for most commercial real estate borrowers.

The Maryland State Senate and House of Delegates have approved the 2012 budget bill that included provisions that require the application of the state recordation tax at the time of recording on all indemnity deeds of trust (and indemnity mortgages) (IDOTs) securing the guaranty to repay loans of $1 million or more. The budget is now with a conference committee that will propose revisions to resolve the differences between the House and Senate versions, which may allow for additional changes to the bill. Assuming that the current language is included in the final budget bill, the new tax on IDOTs shall apply starting on July 1, 2012. We will keep you posted on further developments.

Buried within the Governor of Maryland’s budget is a proposal that eliminates the ability of a grantor, as guarantor of a loan, to defer payment of Maryland mortgage recordation taxes on an indemnity deed of trust (“IDOT”) until such time when the loan liability becomes directly payable by the grantor. Currently, based on a Maryland attorney general’s opinion, the grantor does not pay recordation tax at the time the IDOT is recorded because it only secures a contingent liability as the grantor, as guarantor of the loan, is not primarily obligated to pay the debt secured by the IDOT. In the past, various standalone bills that attempt to impose recordation taxes on IDOTs at the time of recordation have failed to pass; however, this is the first bill to be included in the Governor's budget. The current bill ties the IDOT provision directly to funding of teacher pensions. If enacted, the costs to most commercial borrowers in Maryland are expected to increase significantly because all new IDOTs in excess of $1 million would be subject to mortgage recordation tax. If the bill passes, the change would take effect on July 1, 2012.

On September 20, 2011, the District of Columbia Council agreed to raise the income tax rate on all households in the District earning $350,000 or more per year to 8.95% from 8.5%.  The rate increase shall be effective as of October 1, 2011, the beginning of the District’s 2012 fiscal year.  According to the District’s Office of the Chief Financial Officer, the tax increase affects about 6,000 residents of the District and is projected to increase the District’s tax revenue by $106 million over the next four years.  The Council also approved a measure to eliminate the retroactive application of income tax on interest earned from out of state municipal bonds; opting, instead, to tax the interest earned on out of state municipal bonds beginning with bonds purchased on or after January 1, 2012.

On April 8, 2011, the District’s tax amendment, bluntly named “Payment of Full Hotel Taxes by Online Vendors Clarification Act of 2010”, became effective.  Now DC along with New York are major cities that have legislated a clear prohibition of the very practice that online travel companies (OTCs) routinely use to conduct their businesses.  According to allegations made in a lawsuit filed by DC against the OTCs in DC Superior Court in March, OTCs such as Hotwire.com and Expedia.com pay District sales taxes based on the negotiated lower room rates they pay to the hotels rather than the higher rates they charge the online purchasers of the hotel rooms.  Hundred of cities and other municipalities such as Montgomery County, MD (case filed in December 2010) have filed  similar lawsuits with varying degrees of success.  The OTCs are heralding various court losses, including the recent dismissal of a similar lawsuit in Santa Monica, CA (City of Santa Monica v. Expedia, Inc., et al., Los Angeles Superior Court West District, Case No. SC108568 (decided Mar. 16, 2011), as evidence that their business practices are sound and acceptable.  We anticipate the OTCs will challenge the new DC tax amendment soon.

In Ford Motor Credit Company (“FMCC”) v. Chesterfield County (Va. S. Ct., Dkt. No. 092158, 03/04/2011), the Virginia Supreme Court reversed the Chesterfield County Circuit Court’s determination that all gross receipts of FMCC’s Richmond office were generated in Chesterfield County. Because FMCC’s business of reviewing and closing consumer automobile loan applications and dealership financing packages in the Richmond office relied heavily on activities in numerous other FMCC offices, the Virginia Supreme Court found that the FMCC Richmond office “had only a receivable, not gross receipts.” Likening FMCC’s business to a laboratory collecting specimens for testing in locations outside the County, the Court commented that gross receipts attributable to specimen collections could be taxed, but not gross receipts attributable to the specimen testing. Similarly, the Court held that since the gross receipts of FMCC Richmond office were attributable to services performed outside Chesterfield County and attribution of the gross receipts among the various offices was “impractical or impossible to determine,” that the tax assessment under Virginia’s Business, Professional and Occupation License should be calculated using payroll apportionment and remanded the case for further proceedings.

Federal, DC and Maryland individual income tax returns and estimated payments are due on Monday, April 18, 2011 (even though April 15, 2011 is a Friday this year).  Under the federal tax law, if the date for filing returns falls on a legal holiday, Saturday or Sunday, the filing date is extended to the next day which is not a legal holiday, Saturday or Sunday. For this purpose, legal holidays include legal holidays in the District of Columbia. Thus, this year the filing date is changed because DC celebrates Emancipation Day on April 15.  The next day that is not a legal holiday, Saturday or Sunday, is Monday, April 18.

Please click here to see the IRS notice and click here to see the Maryland notice concerning the deadline.