Legal and Economic Analysis of Maryland Gross Receipts within the Research and Development Tax Credit Framework

Maryland Gross Receipts represent the portion of a taxpayer’s total revenue that is reasonably attributable to business activities conducted within the state, as determined by the Comptroller’s apportionment standards. Within the Research and Development tax credit framework, these receipts serve as the critical denominator for establishing the historical spending baseline used to measure incremental growth in state-based innovation. 1

The conceptualization of Maryland Gross Receipts (MGR) is far more than a simple accounting exercise; it is a regulatory mechanism designed to ensure that the Research and Development (R&D) tax credit is awarded only for genuine expansions of activity within the state’s borders. By tying the credit’s baseline to the same standards used for income tax apportionment, the Maryland General Assembly has created a system where a company’s tax liability and its incentive eligibility are intrinsically linked. This structural alignment prevents multinational or multi-state entities from diluting their historical research intensity by using global revenue as a baseline, which would otherwise result in an artificially low threshold for claiming the state’s 10% “Growth” credit. Instead, the law requires a precise matching of Maryland-sourced income with Maryland-conducted research, ensuring that every dollar of tax credit issued represents a proportional increase in the state’s knowledge-based economy. 4

Statutory Authority and the Legal Definition of Maryland Gross Receipts

The primary authority for the R&D tax credit resides in the Maryland Code, Tax – General § 10-721. This section not only establishes the eligibility criteria for the credit but also provides the foundational definition of the metrics used in its calculation. Under subsection (a)(4), Maryland gross receipts are defined as those receipts that are reasonably attributable to the conduct of a trade or business in the State. The statute explicitly delegates the method of determination to the Comptroller of Maryland, stipulating that these methods must be based on standards similar to those found under § 10–402 of the same title, which governs the apportionment of corporate income for tax purposes. 1

This cross-reference to § 10–402 is the cornerstone of MGR interpretation. It implies that for a receipt to be considered a Maryland gross receipt for R&D purposes, it must meet the same nexus and sourcing requirements as a sale included in the numerator of the sales factor for the state’s corporate income tax return. This ensures that the R&D credit remains a state-specific incentive. The legal framework necessitates that taxpayers look to the Comptroller’s general guidance on income sourcing to determine what constitutes a “Maryland” sale. This includes analyzing the destination of goods, the location where services are performed, and the situs of property that generates rental or royalty income. 6

The Evolution of Apportionment Standards in Maryland

The interpretation of Maryland Gross Receipts has shifted significantly over the last several years due to the state’s transition from a multi-factor apportionment formula to a single sales factor regime. Historically, Maryland utilized a three-factor formula consisting of property, payroll, and a double-weighted sales factor. In this older context, “gross receipts” were part of a broader calculation of business presence. However, following the enactment of House Bill 1794 and Senate Bill 1090 in 2018, the state began a phased transition to simplify and modernize its tax code. 7

For tax years beginning after December 31, 2021, the vast majority of corporations doing business both within and outside Maryland must use a single sales factor apportionment formula. Under this current standard, 100% of the apportionment is determined by the sales factor. For the R&D tax credit, this means that Maryland Gross Receipts are now almost entirely defined by the destination of sales. This shift has profound implications for the R&D credit baseline; for many technology and manufacturing firms, the move to a single sales factor may have altered their MGR tally, thereby shifting their Maryland Base Amount and their resulting eligibility for the Growth R&D credit. 7

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Regulatory Guidance: COMAR 03.04.03.08 and the Sourcing of Receipts

While the Tax-General statute provides the broad definition of MGR, the practical application is governed by the Code of Maryland Regulations (COMAR) 03.04.03.08. This regulation, titled “Apportionment of Income,” is the primary source of guidance from the Maryland Revenue Administration Division on how to calculate the sales factor numerator, which is synonymous with Maryland Gross Receipts. 3

Sourcing Rules for Tangible and Intangible Property

Under COMAR 03.04.03.08(D), the determination of whether a receipt is attributed to Maryland depends on the nature of the underlying transaction. For the sale of tangible personal property, Maryland follows a “destination” rule. Receipts are included in the MGR numerator if the property is delivered or shipped to a purchaser within Maryland, regardless of the f.o.b. point or other conditions of the sale. This includes property that is in transit to a Maryland destination. 8

The sourcing of intangible property, such as patents, copyrights, and trademarks, is more complex and has been subject to increased scrutiny by the Comptroller. Generally, gross receipts from the rental, leasing, or licensing of tangible personal property or real property are included in MGR if the property is physically located in Maryland. For purely intangible assets, the receipts are often sourced based on the extent to which the intangible is used within the state. In the context of the R&D credit, which is often claimed by software and biotechnology firms, the licensing of intellectual property must be carefully scrutinized to ensure that only the portion of revenue derived from Maryland-based users or licensees is included in the baseline calculation. 8

Service-Related Receipts and the “Benefit Received” Standard

For service-based industries, Maryland has historically moved toward a market-based sourcing approach. Receipts from services are included in MGR if the service is performed in the state. If the service is performed both within and outside Maryland, the Comptroller generally looks to where the customer receives the benefit of the service. COMAR 03.04.03.08(D)(3) specifies that receipts from contracting or service-related activities are included in the numerator if the receipts are derived from customers within the state. 8

The rise of Software-as-a-Service (SaaS) and other digital offerings has led to new technical guidance from the Comptroller’s office. Technical Bulletin No. 56, for instance, clarifies the sales and use tax treatment of digital services, which often informs how these same services are sourced for gross receipts purposes. If a SaaS provider is based in Maryland but serves a global customer base, their Maryland Gross Receipts for R&D purposes would only include the revenue from their Maryland-based subscribers. This distinction is vital; if a company incorrectly used its total revenue in the R&D base calculation, it would significantly inflate its baseline, likely disqualifying it from the Growth credit. 11

The Functional Role of Maryland Gross Receipts in the R&D Formula

The Maryland R&D tax credit is bifurcated into two components: the Basic Credit and the Growth Credit. Although the Basic Credit (3% of expenses up to a base amount) was effectively repealed for most taxpayers in 2021 to focus resources on the Growth Credit, the calculation of the “Maryland Base Amount” remains the central hurdle for all applicants. Maryland Gross Receipts are the essential variable that adjusts this base amount to reflect the taxpayer’s current economic scale. 3

Calculating the Maryland Base Percentage

The “Maryland Base Percentage” (equivalent to the federal fixed-base percentage but state-specific) is the ratio of historical Maryland R&D spending to historical Maryland Gross Receipts. The statute requires a four-year look-back period. Specifically, the percentage is determined by dividing the aggregate Maryland qualified research and development expenses for the four taxable years immediately preceding the credit year by the aggregate Maryland gross receipts for those same four years. 1

The formula is expressed as:

$$\text{Maryland Base Percentage} = \frac{\sum_{i=1}^{4} \text{Maryland QREs}_{t-i}}{\sum_{i=1}^{4} \text{Maryland Gross Receipts}_{t-i}}$$

This percentage is generally capped at 16% for certain entities to align with federal principles, although Maryland’s specific regulations allow for nuances based on the entity’s history. By using MGR as the denominator, the state accounts for inflation and business growth. If a company’s revenue doubles over the four-year period, its “reasonable” baseline of R&D spending should also presumably increase, and the use of gross receipts in the denominator reflects this expectation. 3

Establishing the Maryland Base Amount

Once the base percentage is calculated, it is applied to the company’s recent performance to create the “Maryland Base Amount.” This is done by multiplying the Maryland Base Percentage by the average annual Maryland gross receipts for the four taxable years immediately preceding the credit year. 3

$$\text{Maryland Base Amount} = \text{Maryland Base Percentage} \times \left( \frac{\sum_{i=1}^{4} \text{Maryland Gross Receipts}_{t-i}}{4} \right)$$

Research and development expenses incurred in the current tax year that exceed this Maryland Base Amount are eligible for the 10% Growth R&D Tax Credit. The logic of this calculation is to reward “intensity.” A company that spends a higher-than-average percentage of its Maryland revenue on Maryland research is viewed as a high-growth innovator and is thus entitled to a larger credit. 5

Special Rules for New Businesses and Startups

Recognizing that pre-revenue startups and new entrants to the Maryland market may not have four years of historical data, the law provides for modified calculations. If a business has been in existence for fewer than four years but at least one year, the base percentage and average annual receipts are determined based on the number of years the business has been in operation in the state. 1

Crucially, for “de novo” startups—those in their first year of incurring R&D expenses in Maryland—the Maryland Base Amount is defined as zero. This enables a new company to claim the 10% Growth credit on every dollar of its initial Maryland R&D investment, provided it receives certification from the Department of Commerce. This “zero-base” rule is one of the most significant incentives for attracting new technology firms to the state. 4

Administrative Procedures and Revenue Office Guidance

To successfully claim the R&D credit, taxpayers must navigate a dual-agency process involving the Maryland Department of Commerce and the Comptroller of Maryland. The Department of Commerce handles the certification of the credit, while the Comptroller’s office manages the actual application of the credit against tax liability and the processing of refunds. 1

The Certification Process and the November 15 Deadline

The most critical administrative hurdle is the application for certification. By statute, an individual or corporation must submit an application to the Department of Commerce by November 15 of the calendar year following the taxable year in which the R&D expenses were incurred. For example, a business with a 2024 calendar tax year must apply by November 15, 2025. Failure to meet this deadline is fatal to the credit claim, as the Department has no statutory authority to waive the filing date. 1

The application requires a comprehensive schedule of Maryland Gross Receipts and Maryland Qualified Research Expenses for the credit year and the four prior years. The Department of Commerce requires that these figures be derived from the taxpayer’s Maryland income tax returns (specifically Form 500 for corporations or Form 510 for pass-through entities). If the MGR figures on the R&D application do not reconcile with the sales factor reported on the tax returns, the Department may reject the application or require an independent audit verification. 3

Local Revenue Office Guidance on Amended Returns

Once the Department of Commerce certifies the credit—a process that typically concludes by February 15 of the year following the application—the taxpayer receives a certification letter. To claim the credit, the taxpayer must:

1. File an amended Maryland income tax return for the year in which the R&D expenses were actually incurred.
2. Attach a copy of the certification letter from the Department of Commerce.
3. Include Form 500CR (for businesses) or Form 502CR (for individuals). 1

The Comptroller’s office has issued several Administrative Releases and Technical Bulletins to guide this process. Administrative Release No. 6, while primarily focused on the taxation of pass-through entities, clarifies how credits generated at the entity level are passed through to members and reported on their individual returns. For partnerships and LLCs, the entity must report the certified credit to its members on Maryland Schedule K-1 (510/511), and the members must attach the certification to their own amended filings. 22

Recordkeeping and Audit Standards

The Comptroller’s Revenue Administration Division maintains a rigorous audit program for R&D credits. Guidance suggests that taxpayers should retain documentation for at least four years after the credit is claimed. Essential records include:

• Detailed general ledger reports identifying Maryland-specific R&D wages, supplies, and contract research costs.
• Workpapers reconciling the Maryland Gross Receipts used in the R&D application to the sales factor on the corporate tax return.
• Documentation of the “Four-Part Test” for each research project to prove it meets the federal definition of qualified research under IRC § 41(d).
• Evidence of “Good Standing” with the State Department of Assessments and Taxation (SDAT), which is a prerequisite for receiving the credit certificate. 5

Small Business Refundability and the Asset Test

Maryland’s R&D tax credit program is particularly advantageous for small businesses due to its refundability provisions. While larger corporations can only use the credit to offset tax liability (carrying forward any excess for up to seven years), eligible small businesses can receive the excess as a cash refund. 1

Definition of a Small Business

For the purposes of the R&D tax credit, a “small business” is defined as a for-profit corporation, LLC, partnership, or sole proprietorship that has net book value assets totaling less than $5,000,000 at the beginning or end of the taxable year for which the credit is claimed. 5

“Net book value assets” is a specific financial reporting term. It refers to the total assets of the company as reported on its balance sheet, minus accumulated depreciation and amortization. It is important to note that liabilities are not subtracted in this calculation. This asset-based test is strictly applied; a company with $4.9 million in assets and $10 million in debt is a “small business,” whereas a company with $5.1 million in assets and no debt is not. 5

The Small Business Set-Aside and Proration

The state allocates its $12 million annual credit pool into two distinct “buckets.” By statute, $3.5 million is reserved specifically for small businesses. If the total amount of credits applied for by small businesses exceeds $3.5 million, the credits for each applicant are prorated. 1

The proration mechanism is critical for financial planning. If the small business pool is oversubscribed by a factor of two, a company that qualified for a $100,000 credit would only receive a certificate for $50,000. Conversely, if the small business pool is underutilized, the remaining funds are transferred to the general pool for larger businesses, which is capped at $8.5 million plus any transferred amounts. 1

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Federal Conformity and the “One Big Beautiful Bill” (OBBBA)

A major source of recent complexity in the Maryland R&D landscape is the state’s response to the federal “One Big Beautiful Bill Act of 2025” (OBBBA). This federal legislation significantly altered the treatment of research and experimental expenditures under IRC § 174, which in turn impacts how Maryland calculates both its income tax and its R&D credits. 27

The Restoration of R&D Expensing

The OBBBA restored the ability for businesses to immediately deduct domestic R&D expenses in the year they are incurred, reversing the mandatory five-year amortization requirement that had been in place since 2022 under the Tax Cuts and Jobs Act (TCJA). For federal purposes, this provides an immediate tax benefit and improves cash flow for innovative firms. 27

Maryland’s Decoupling and Revenue Impact

Maryland is a “rolling conformity” state, meaning it typically adopts federal tax changes automatically. However, Maryland law (Tax-General § 10-108) requires the Comptroller to analyze any federal change that will have an impact on state revenue of $5 million or more. If the impact exceeds this threshold, the state must “decouple” from the federal provision for the current tax year unless the General Assembly takes specific legislative action to conform. 29

In September 2025, the Maryland Bureau of Revenue Estimates released its 60-day report on the OBBBA. The analysis determined that conforming to the immediate expensing of R&D costs would reduce state general fund revenue by $77.9 million in fiscal 2026. As a result, Maryland has officially decoupled from the OBBBA’s R&D expensing provisions for the 2025 tax year. 31

For taxpayers, this means that while they may expense R&D costs on their federal returns, they must continue to capitalize and amortize those same costs over five years on their Maryland returns for the 2025 tax year. This creates a temporary “add-back” modification on the Maryland return. However, this decoupling does not change the definition of Maryland Qualified Research Expenses used to calculate the R&D credit, which still follows the federal definitions under IRC § 41. 28

Practical Application: Comprehensive Example and Case Study

To understand the interplay of Maryland Gross Receipts, the Base Amount, and the proration of the credit, consider the case of “AeroBio Maryland, Inc.,” a mid-sized biotechnology firm that conducts all of its research and development within the state. 5

AeroBio Maryland, Inc.: Financial Profile

The company is preparing its R&D credit application for the 2024 tax year. It is not a small business, as its net book value assets are $15,000,000. The company needs to calculate its 10% Growth Credit. 5

Step 1: Historical Data Gathering (2020-2023)

The company’s historical Maryland Gross Receipts (sourced via COMAR 03.04.03.08) and its Maryland Qualified Research Expenses are as follows: 8

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Step 2: Calculate the Maryland Base Percentage

The base percentage is the ratio of aggregate historical expenses to aggregate historical receipts. 1

$$\text{Base Percentage} = \frac{\$9,500,000}{\$95,000,000} = 10\%$$

Step 3: Calculate the Maryland Base Amount

The base amount is the threshold AeroBio must exceed in 2024 to qualify for the Growth credit. 3

$$\text{Base Amount} = 10\% \times \$23,750,000 = \$2,375,000$$

Step 4: Determine the 2024 Credit Year Excess

In 2024, AeroBio significantly increased its research budget, incurring $4,000,000 in Maryland QREs. 5

$$\text{Excess QREs} = \$4,000,000 – \$2,375,000 = \$1,625,000$$

Step 5: Calculate the Tentative Growth Credit

The statutory credit rate is 10% of the excess. 1

$$\text{Tentative Credit} = 10\% \times \$1,625,000 = \$162,500$$

Impact of Program-Wide Proration

Because AeroBio is not a small business, its credit will be drawn from the $8.5 million general pool. Historically, this pool is heavily oversubscribed. If the total Growth credits applied for by all non-small businesses in 2024 is $85,000,000, the proration factor would be: 16

$$\text{Proration Factor} = \frac{\$8,500,000}{\$85,000,000} = 0.10 \text{ (or 10%)}$$

AeroBio’s final certified credit would be:

$$\text{Certified Credit} = \$162,500 \times 0.10 = \$16,250$$

This example highlights why the R&D credit, while legally 10%, often results in an effective rate of 1-2% for larger firms. The accurate reporting of Maryland Gross Receipts is essential; if AeroBio had mistakenly included its global receipts (e.g., $500 million) in the denominator of Step 2, its Base Percentage would have dropped to 1.9%, and its 2024 Base Amount would have been much lower, potentially increasing its tentative credit but also increasing its risk of a major audit adjustment. 6

Emerging Trends and Policy Evaluation

The Maryland R&D tax credit is currently undergoing rigorous evaluation by the Department of Legislative Services (DLS) as it approaches its scheduled termination on June 30, 2027. This evaluation provides a window into the program’s successes and its perceived shortcomings. 33

Industry Distribution and Economic Impact

Recent statistics from the Department of Commerce and DLS reveal a high concentration of credit activity in specific innovation corridors. The “Information” sector (including software publishers and computer infrastructure firms) and the “Professional, Scientific, and Technical Services” sector (biotechnology and life sciences) receive the vast majority of awards. 5

In 2019, Commerce certified 410 businesses. These companies reported over $2.6 billion in Maryland-based R&D spending. While this indicates a robust innovation ecosystem, the DLS evaluation suggests that the $12 million annual cap is too small to significantly shift statewide corporate behavior. The report noted that for many large firms, the credit is seen as a “bonus” rather than a deciding factor in where to locate research facilities. 25

The Income Tax Benefit Transfer Program (HB 35/2025)

An emerging legislative trend is the effort to make unused R&D credits more liquid. House Bill 35 (2025) proposes the establishment of the “Income Tax Benefit Transfer Program.” This program would allow eligible technology companies—specifically those that are pre-profitable and have unused R&D credits or Net Operating Losses (NOLs)—to “sell” or transfer these tax benefits to other Maryland corporate taxpayers. 26

This program, if successfully implemented, would dramatically increase the value of the R&D credit for early-stage companies. Currently, a non-small business that is pre-profitable can only carry its R&D credits forward for seven years. If the company does not become profitable within that window, the credit expires worthless. The Transfer Program would allow these firms to exchange the credit for immediate cash from a profitable buyer, providing a new source of non-dilutive capital for Maryland’s tech sector. 26

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Strategic Implications for Business Practitioners

Understanding the nuances of Maryland Gross Receipts is a strategic necessity for tax directors and business owners. The intersection of apportionment law, R&D regulations, and federal conformity creates a complex landscape where errors can lead to significant financial loss or audit exposure. 5

Unitary Business and Controlled Groups

A frequent area of audit contention involves the treatment of affiliated corporations. Maryland law stipulates that all members of a controlled group of corporations (as defined by IRC § 41(f)) must be treated as a single taxpayer for the purposes of the R&D credit. This means that Maryland Gross Receipts and QREs must be aggregated across all members of the group that have a nexus with Maryland. 3

If a parent company in California has three subsidiaries in Maryland, the R&D application must include the combined MGR and QREs of all three subsidiaries to establish the base amount. The resulting credit is then allocated back to the individual subsidiaries based on their proportionate share of the research expenses. Failure to aggregate correctly is a leading cause of credit denials during the Department of Commerce’s review process. 3

The Importance of the “Reasonably Attributable” Standard

As Maryland continues to use the “reasonably attributable” standard in Tax-General § 10-721, businesses should be proactive in documenting their sourcing methodologies. This is especially true for companies with complex revenue streams, such as those involving multi-year service contracts, digital advertising, or the licensing of intellectual property. 1

The Comptroller’s decision to decouple from the OBBBA’s immediate expensing for the 2025 tax year serves as a reminder that Maryland’s tax policy is driven by local budgetary concerns. Taxpayers must ensure their Maryland modified income calculations correctly add back federal R&D expenses while still maintaining separate, accurate records for the state R&D credit application. The 60-day report from the Bureau of Revenue Estimates is a vital document for any firm projecting its 2025 and 2026 state tax liabilities. 31

Conclusion

Maryland Gross Receipts are the definitive metric for establishing the baseline of corporate innovation in the State of Maryland. Through a complex statutory and regulatory architecture that bridges Tax-General § 10-721 with the apportionment standards of § 10-402 and COMAR 03.04.03.08, the state has created a highly specific mechanism for rewarding incremental R&D growth. While the transition to a single sales factor has streamlined the determination of these receipts for many firms, the severe oversubscription of the program and the recent decoupling from federal tax reform (OBBBA) necessitate a high degree of technical precision in reporting. For small businesses, the asset-based test and refundability provisions offer a lifeline of cash flow, while larger firms must navigate proration and long-term carryforward strategies. As the program approaches its 2027 sunset, the data suggests it remains a cornerstone of the state’s strategy to attract and retain high-tech industries, provided that practitioners can successfully navigate its intricate compliance requirements. 1

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