NOTICE: House Bill 1143 (Chapter 640, Acts of 2007), which was passed during the 2007 session of the Maryland General Assembly, repealed this withholding requirement affecting nonresident contractors for contracts ENTERED into on or after July 1, 2007.
Persons and business entities who enter into contracts to improve real property with nonresident general contractors for $500,000 or more, or with nonresident subcontractors for $50,000 or more under contracts where the improvements are $500,000 or more, must withhold 3 percent of the total contract price upon completion of the contract pending receipt of a Tax Clearance Certificate from the Comptroller.
A nonresident contractor is a contractor that does not maintain a "regular place of business" in Maryland. A "regular place of business" includes having a bona fide office, factory, warehouse or any other space in Maryland at which a person is regularly doing business in its own name and is continuously maintained, occupied and used by the person or the person's regular employees to carry on the business. Sales and use tax and withholding tax including any penalty and interest associated with those taxes are subject to 3 percent withholding.
Any person who directly contracts with a nonresident contractor for the improvement of real property where the total value of the improvement equals or exceeds $500,000 must withhold 3 percent of the total contract price. Any general contractor who has contracted for the improvement of real property where the total value of improvement equals or exceeds $500,000 and does business with a nonresident subcontractor under a contract that equals or exceeds $50,000 must withhold 3 percent of that total contract price.
All contracts for the improvement of real property of any kind, except for contracts with an owner of property that contracts for the construction of a new home, including a condominium or cooperative unit, or an improvement of a home or condominium or cooperative unit that the owner intends to occupy within a reasonable period of time are subject to the requirement.
Requesting a tax clearance certificate
A Tax Clearance Certificate authorizes the person withholding 3 percent of the contract price from the nonresident contractor to release that money to the contractor. The Tax Clearance Certificate is furnished by the Comptroller to the nonresident contractor and to the person required to withhold the required 3 percent of the contract price. The nonresident contractor can make a written request for a Tax Clearance Certificate only after the contract has been completed. The contract is considered completed when the performance requirements of the contract have been met by the nonresident contractor or when full payment (less the 3 percent withholding) is made to the nonresident contractor by the person that contracted with the nonresident contractor, whichever occurs first.
The request for a Tax Clearance Certificate must contain the following:
- Type of project.
- Site address.
- Nonresident contractor's name and address.
- Date the contract was completed.
- Certification that all records pertaining to the contract are available in Maryland for review.
- Location of the records if not submitted with the request
- Name and address of the person required to withhold 3 percent of the contract price.
- Total contract price.
The following records must also be submitted with the request:
- Purchase invoices and related journals and ledgers.
- Payroll records of individual employees (including payroll journals) and copies of filed Maryland employer's withholding.
- Copies of filed use tax returns.
If the records cannot be submitted, provide the Maryland address and telephone number of the location where original records are available. If the records are voluminous, please contact us for an alternative examination method. Send the request and any appropriate records to:
Comptroller of Maryland
Compliance Division, Room 407
301 West Preston Street
Baltimore, MD 21201-2383
The request can also be faxed to 410-333-7749 or e-mailed to email@example.com.
See sample request for Tax Clearance Certificate.
If no taxes are due - tax clearance certificate
If within 30 days after receipt of a written request for a Tax Clearance Certificate, the Comptroller determines that no sales or use tax and withholding tax are due from the nonresident contractor, the Comptroller shall furnish to the nonresident contractor and to the person required to withhold the 3 percent of the contract price, a Tax Clearance Certificate. After receiving the Tax Clearance Certificate, the person withholding the 3 percent may pay the nonresident contractor the amount withheld free from any claims by the Comptroller.
If taxes are due - certificate of tax due
If within 30 days after receipt of a written request for a Tax Clearance Certificate the Comptroller determines that the nonresident contractor has a sales and use tax or withholding tax liability due to the state, the Comptroller will issue a Certificate of Tax Due to both the person required to withhold 3 percent of the contract price and the nonresident contractor. The Certificate of Tax Due will include the amount of sales and use tax, withholding, or both, due from the nonresident contractor, plus penalty and interest.
The person required to withhold from the nonresident contractor:
- Shall pay to the Comptroller the amount due up to 3 percent of the contract price.
- Shall include with the payment a statement identifying the name of the person required to withhold, the type of project, the site address, the nonresident contractor's name and the date the contract was completed.
- May pay to the nonresident contractor the excess of the amount withheld over the stated amount due on the certificate.
If additional taxes are due
If the Comptroller's Office determines the taxpayer has an additional liability after a certificate has been issued, the Comptroller may issue an assessment against the nonresident contractor for additional tax, penalties and interest due and take appropriate legal action to effect collection.
If no certificate is issued
If, however, the Comptroller fails to issue either a Certificate of Tax Due or a Tax Clearance Certificate, the person required to withhold 3 percent of the contract price may pay the nonresident contractor the amount withheld. However, receipt of the 3 percent withholding does not relieve the nonresident contractor from any sales and use tax or withholding tax liability which may be determined to be due at a later date.
The nonresident contractor will be issued an assessment and may appeal the Notice of Assessment from the Comptroller of Maryland to the Hearings and Appeals Section of the Compliance Division. An appeal of an assessment by the nonresident contractor does not affect the remittance due by the person required to withhold and pay over 3 percent of the contract price to the Comptroller's Office.
Failure to request certificate and/or withhold
The person withholding 3 percent of the contract price is required to remit that amount to the Comptroller's Office if the nonresident contractor fails to make a written request for a Tax Clearance Certificate, or fails to meet all the filing requirements within 30 days after completion of the contract. Persons who fail to withhold and/or pay over the 3 percent are liable for the amounts due. The liability extends to any sales and use tax, withholding tax, or both up to 3 percent of the contract amount, including penalties and interest relating to these taxes. The Comptroller shall take appropriate legal action to recover amounts required to be withheld and/or paid over.
Contracts and amendments
For contracts entered into on or after July 1, 2003, if amendments to the total contract price bring the contract price to $500,000 or more, the 3 percent withholding is then required for the entire contract price, including any subcontracts of $50,000 or more not yet completed. Subcontracts for $50,000 or more completed prior to meeting the $500,000 threshold are exempt from the 3 percent withholding requirement.
Amendments, additions and/or separate contracts related to or associated with real property improvement are subject to the 3 percent withholding if the total value of the contract including amendments, additions and/or separate contracts for the same period equals or exceeds $500,000 for a general contractor and equals or exceeds $50,000 for a subcontractor. In contrast, contracts entered into before July 1, 2003, are not subject to the 3 percent withholding requirement. An amendment executed July 1, 2003, or later for which the total value of the amendment is at least $500,000, and the work to be performed under the amendment does not fall within the scope of the original contract is subject to the withholding requirement as well as any subcontract which equals or exceeds $50,000.
For more information, please call 410-767-1942 or toll free 1-800-648-9638.