Contractors say law forces them to collect taxes

They must withhold taxes of non-Md. subcontractors

Md. borrowed idea from R.I.

New statute is assailed, and repeal will be sought

October 05, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

To his surprise, Stephen T. Kimball has found himself on the front lines of the Ehrlich administration's battle to generate additional tax revenue.

Kimball calls himself a "dyed-in-the-wool" Republican, but he doesn't work for Gov. Robert L. Ehrlich Jr. He is senior vice president of Kimball Construction Co., a general contracting firm in White Marsh that specializes in building additions for Fortune 500 manufacturing facilities.

He and other Maryland general contractors are alarmed by a little-noticed change in state tax law at the end of the last legislative session. It requires them to become tax collectors, in a sense, by requiring them to ensure that state taxes on labor and equipment are paid by their out-of-state subcontractors.

If the general contractors don't comply with the new law, they can be held liable for any taxes that are owed by the subcontractor.

Under the law, a general contractor is required to withhold 3 percent of the money the out-of-state subcontractor is to be paid.

The money is released after the subcontractor completes the project and receives a "clearance certificate" from the comptroller's office that no taxes are due on material or labor from any jobs performed in the state.

But if the subcontractor hasn't paid taxes, the general contractor must pay the comptroller the amount due up to the 3 percent that has been withheld.

If the general contractor fails to withhold the 3 percent or fails to pay the state what is owed, it can be held liable for any taxes the subcontractor owes - up to 3 percent of the contract price, according to the law.

"I have a lot of problems with us being ... deputized to collect the tax for the state of Maryland," Kimball said. "To put the burden of collection on the business community is very onerous. It is going to cost us money. It is going to potentially make us liable for [unpaid] taxes."

State officials defended the mechanism as a way to help collect millions of dollars owed Maryland from out-of-state subcontractors who leave without paying their due.

"By the time we find out about these contracts, the non-resident contractor is gone," said Linda Tanton, director of the compliance division in the state comptroller's office. "It is very difficult once they are out of state to try to chase down those dollars. We have had some where we tried to chase them down in Georgia."

The sum that state officials believe they can recover isn't huge in terms of the state's $22 billion-plus budget, however. State officials estimate that they can collect about $3 million a year that isn't being collected now, Tanton said. The law took effect July 1, but caught many contractors by surprise. It affects all commercial projects with a total value of at least $500,000, in which an out-of-state subcontractor stands to make $50,000 or more - not large jobs by industry standards.

"It is a burdensome thing. It is extra bookkeeping. It is just a hardship," said Calvin H. Coblentz, executive director of the Maryland Chapter of Associated General Contractors in Lutherville.

Coblentz said he and the chapter's lobbyist were blindsided by the law, which was an amendment to House Bill 935, the Budget Reconciliation Act of 2003. He said he didn't learn of it until July, three months after the legislative session ended, and has been talking to members about it since.

"In principle, they are asking general contractors to do something that they have absolutely no ability to control, which is to guarantee that a subcontractor is paying its taxes," said Dirk Haire, managing partner of Haire Logan LLP, an Annapolis law firm.

"They [general contractors] have no right to see that information. They can't go to the subcontractor and say, 'Show me proof that you have paid your taxes.' All it does is add another level of risk to an already risky business."

William M. Kerr II, president of Concord Associates Inc., a Baltimore general contractor, said the state is asking contractors to enforce Maryland's laws.

"We don't think the state should ask us to do their work for them," Kerr said. "Obviously, the state needs money, but I have got to run my company, too."

As a result of the new law, Kerr said, he might use fewer out-of-state subcontractors to minimize hassles.

Others worry that neighboring states might reciprocate with similar laws, which could potentially harm Maryland contractors who do business throughout the mid-Atlantic.

Tanton of the comptroller's office said the idea of pursuing subcontractors more aggressively arose during a conference with officials from other states about ways to raise money and control costs.

The contractor escrow plan came from Rhode Island, which for about 20 years has required contractors to make sure that out-of-state subcontractors pay their taxes.

"It has worked great," said John Nugent, chief of examination for the Rhode Island Division of Taxation. "Everybody just complies and pays their taxes and there are really no issues.

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