Maryland Tax Updates – January 2024

4 min

Tax Court Modifies Rushmore Method for Hotel Valuation. The Maryland Tax Court recently modified the traditional Rushmore income approach used to determine the fair market value (FMV) of the real estate component of a hotel. The Court modified the approach to allow the removal from net operating income (NOI) of income attributable to (1) start-up costs and (2) a return “on” and “of” furniture, fixtures, and equipment (FF&E). The challenge presented by using an income approach in valuing the real estate component of a hotel for real property tax purposes is that a hotel is a business that generates income through the provision of a variety of bundled facilities and services in addition to the real estate. In other words, the NOI of a hotel is generated by the use of the total assets of the business, which include not only real property, but also tangible personal property, intangibles, and financial assets. Accordingly, to determine the FMV of the real estate component of a hotel for property taxation purposes through an income approach, the contributions of tangible personal property, intangibles, and financial assets to the NOI of the hotel must be removed. The so-called Rushmore Method is often utilized by appraisers to accomplish this task. Over the years, the courts have clarified and refined the Rushmore Method.

In PNR Hotel XXVI Owner LLC v. Supervisor of Assessments, Appeal No. 21-RP-MO-0432, the Tax Court clarified the Rushmore Method in two respects. This case was an appeal involving a Canopy Hotel that was approximately four years old as of the date of value. The Tax Court removed from the NOI of the total assets of the hotel business: (1) a return “on” and “of” FF&E and (2) amortized start-up costs of the hotel, including, among other things, the costs incurred for the training and assemblage of a workforce; the establishment of regulatory compliance, accounting, and other business systems; and pre-opening advertising and marketing. In approving the removal of these costs from NOI, the Tax Court noted that, because the Canopy Hotel was relatively new, the property owner was able to demonstrate how these costs contributed to the generation of operating income. In an earlier decision, RRI Acquisition Company, Inc. v. Supervisor of Assessments of Howard County, 2006 WL 925212 (Md. Tax 2006), the Tax Court had not allowed the removal of start-up costs or the removal of a return both “on” and “of” FF&E. Accordingly, the Tax Court’s decision in the PNR Hotel case indicated a willingness to modify the Rushmore Method as necessary to ensure that NOI generated by tangible personal property, intangibles, and financial assets is not capitalized to obtain a real estate value.

Comptroller Offers Private Letter Rulings. The Maryland Comptroller is now accepting requests from taxpayers for private letter rulings regarding taxes under the Comptroller’s jurisdiction. Prior to 2024 the Comptroller did not have a formal process for taxpayers to request binding guidance on a private basis. For the first time the Comptroller will now have staff dedicated to providing written guidance in response to specific facts submitted by taxpayers. No fee is required to submit a petition for a PLR. MD Technical Bulletin 44 provides guidance and procedures for obtaining a PLR.

City Cannot Require Recordation Tax Holdback. Baltimore City had a policy requiring that recordation taxes on undistributed holdbacks secured by and reported in a deed of trust (DOT) be held back by the title company as a condition for approving recordation of that DOT. The requirement applied regardless of whether those holdback amounts had actually been distributed. In a recent opinion the Maryland Tax Court ruled that the City’s policy is invalid under state law and required the City to refund recordation tax that it had levied on undistributed holdbacks. Specifically, the Court found that the City-mandated holdback was inconsistent with the recordation tax statute, which offers a mortgagor the option to pay recordation tax on holdbacks as they are distributed rather than paying in full on the secured amount at the time of recording. Presidential Title, LLC v. Mayor & City Council of Baltimore, Maryland Tax Court No. 21-RE-OO-0469 (10/04/2023).

Challenges to the Digital Ad Tax Continue. Maryland’s tax on digital advertising is under challenge in several legal proceedings. In the latest development the Fourth Circuit Court of Appeals rendered mixed rulings. Favoring the State, the court ruled that the Tax Injunction Act barred the plaintiff’s claims that the tax violates the Internet Tax Freedom Act and the federal due process and commerce clauses.

Favoring the plaintiff’s challenges to the tax, the Court directed the lower federal court to consider a challenge focused on a “pass-through” provision for the tax. The Court held that a decision in the Maryland court system where the tax is also being challenged did not render the federal case on this point moot. Accordingly, the lower court should consider the pending constitutional challenge to the tax’s pass-through provision. Chamber of Commerce of the United States v. Lierman, U.S. Court of Appeals for the Fourth Circuit (No. 22-2275) (01/10/2024).