Reed Smith’s Relationships: An Interview with Peter Franchot, Comptroller of Maryland

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Reed Smith attorney Jeremy Abrams meets regularly with heads of state revenue departments to bring Bloomberg Tax readers candid and timely observations from the country’s top state tax decision-makers. In this special edition, Abrams is joined by Reed Smith attorney DeAndré Morrow, a former staff tax attorney at the Maryland Comptroller’s office. Abrams and Morrow talked to Comptroller of Maryland Peter Franchot about several issues, including single-sales-factor apportionment, the Wayfair case, and tax administration in the Old Line State.

Jeremy S. Abrams DeAndre Morrow Peter Franchot

Interview by Jeremy Abrams and DeAndré Morrow

Peter Franchot is Comptroller of Maryland. Jeremy Abrams and DeAndré Morrow are attorneys with Reed Smith LLP and can be reached at jabrams@reedsmith.com and dmorrow@reedsmith.com.

Meeting Place

Reed Smith: We’re here at the Capital City Confectionery in Takoma Park, Md., enjoying a hot cup of coffee and some freshly baked cookies with Comptroller Peter Franchot. It’s great to see you again, Peter. Is there any particular reason you chose this location?

Franchot: Well, this is a fabulous small business. They’re heavily involved in the community, they strengthen the community, and I love to frequent them. I like to get out of Annapolis and meet in the “real” Maryland as much as possible. Gives me a chance to hear concerns and to see firsthand how the economy and how the economic policies are impacting real businesses.

For me, it’s like, hey, I’m here on the front lines with these people. As you know, Jeremy, you’re on my Business Advisory Council, I use that as a reality check on policy because we hear from the front lines what’s going on. Because the economic data we collect is based on past action, the actual, real-time situation is sometimes different than the numbers we’re reporting to the governor and the legislature. So it’s always good to get out and learn firsthand about the current economic climate in our communities.

Single-Sales-Factor Legislation

Reed Smith: Speaking of legislation, what are your thoughts on the single-sales-factor law recently signed by Gov. Larry Hogan (R)?

Franchot: I’m glad he signed it. I supported that effort very much. I’m sorry that it’s phased in; I thought it should have been put into place faster. As I understand the issue, Maryland companies with property and employees in state that are headquartered in state were penalized under the previous system compared to out-of-state companies. And now it’s shifting back so the in-state companies are getting a tax cut and the out-of-state ones are getting a tax increase, and that will level the playing field.

We’re going to very carefully implement what the legislature passed. I was not intimately involved in the carve-outs, but we will look into this more. For example, we’re going to do the regulations, and I’m sure lots of people are going to be coming in to see us on that subject—and appropriately so because we want to do the right thing.

It won’t make a big difference from a revenue perspective. Obviously some companies are going to pay more tax, as they should in my opinion, and others will pay less because they have their headquarters and employment and property focused in the state. Under the old system, you could argue it would be better if they weren’t located in Maryland. I think 22 or 23 states have already moved to single-sales-factor apportionment, so it’s not like we’re purporting to be trailblazers.

Private-Letter-Ruling System

Reed Smith: In 2016, the legislature required your office to establish a private-letter-ruling system and to request additional resources if necessary. In 2017, you requested funding to hire six legal professionals to implement that PLR system, but the General Assembly refused and deducted $300,000 from your payroll budget. Do you have an update for 2018?

Franchot: The update is more of the same, unfortunately. Not only has the legislature not given us the resources for this, but they actually subtracted another $500,000 from my budget this past session. So, before we can make any progress on this, they’re going to have to put back the $500,000 plus the money for the private-letter-ruling system. Right now it seems the legislature is concerned about my independence as an elected official, and they don’t like the bipartisanship with Governor Hogan, and it’s all just politics. But you asked the question about a very understandable request from the private sector. Hopefully, next session the political games will be over, and we can try to move forward on this issue.

Unfortunately, taxpayers do not have an alternative to a PLR system right now. I hate to report it. Guys, this is the way Annapolis works. I’m not under anyone’s thumb, and that annoys the powers that be, and that’s the reason we have exercises like this. It’s just a sad state of affairs.

Grading Maryland’s Tax Administration

Reed Smith: The Council On State Taxation (COST) recently came out with its Scorecard on State Sales and Use Tax Administration. Maryland was graded a “C.” Do you pay attention to these types of surveys?

Franchot: First, I will say we just got an enormous poll that came out in the field—the “Goucher Poll”—and I think I’m the first elected official in the history of the state with equal favorability between Democrats and Republicans. It’s very pleasing to me that they found that 42 percent of Democrats view me favorably, and 42 percent of Republicans view me favorably. That is unheard of in my working knowledge of polls because everything has become so partisan these days. Everyone seems to talk the rhetoric, but very few are able to have a figure like that in the polls. Whatever it is I’m serving up to folks as Comptroller is obviously popular across different parties. I value that because I say very clearly there’s no Maryland tax return that’s a Democratic return, there’s no Republican return, there’s just Maryland returns. That’s how we deal with people.

On our Scorecard grade, I think this may have to do with some of our problems with making electronic sales tax returns. We have an ancient system that we are working to replace. Thanks to a lot of hard work by the employees of the agency, we just finished our various tax seasons without any crisis, but it keeps me up at night because the system is so old; it’s like antique.

Reed Smith: That was the joke when I was at the Comptroller’s Office. The “SMART system” is so archaic that hackers aren’t old enough to understand the code. So one benefit is the Comptroller’s system may never get hacked!

Franchot: That may be! Only two of our 1,200 people can actually help with the code, and both of them are long past due for retirement. Anyway, we have a new proposal, a new system under bid out on the streets. That’s a very significant improvement to the technology. I think that will help the rating. And hopefully the legislature will give us the resources to do letter rulings as well. We pride ourselves on customer service. These ratings—I’m not exactly sure about this Scorecard, but customer service is the main product we offer, and the taxpayers of Maryland seem to be pleased with our efforts.

Maryland’s Fiscal Watchdog

Reed Smith: Tell us more about your current role as Comptroller. What are your day-to-day responsibilities, and how do you get such high popularity?

Franchot: First of all you, need to show up. If you stay in Annapolis, nobody is going to understand what the Comptroller does or who the Comptroller is. So, I spend a lot of time visiting different sections of the state speaking primarily to members of the small business community. I find that to be enormously beneficial because you get this real-time info from folks who are dealing with what I call the “Maryland economy” as opposed to the “Annapolis” budget that legislators are looking at.

Second, you need to do your job. I mean, if I don’t have a relatively smooth tax season—we’re getting $2.9 billion in refunds this calendar year, and if they don’t go back quickly and smoothly or if my system freezes up, I could be an ex-Comptroller very quickly.

So showing up, doing your job, and being a fiscal moderate—which is a little different from being a legislator—legislators just authorize things, comptrollers actually collect the money. In Maryland, we have this unique system where I vote on many of the big contracts on the Board of Public Works. So being a fiscal moderate, I find, is a little bit of a change for me because I’m a recovering legislator. Now I’m actually voting, not on the authorization, but on the actual spending of the money. Additionally, I find my relationship with Governor Hogan on the Board of Public Works around fiscal issues to be very much a positive with the citizens of the state. That’s a very big responsibility there.

I have 1,200 employees. When I first arrived, I said I’m not going to ask you to do anything. I just want to show you in the first six months that I’ve got your backs and I’m going to get your resources for you. I did that, and now over the past years, we’ve been moving to really amp up our customer service. This has proven to be enormously popular with taxpayers. We insist that every taxpayer that gets in touch with us gets respect. That is the key issue here for us. We can’t treat the public like they’re gum on the bottom of our shoes and something to be avoided. They have to be treated with respect, they have to get a response—even though they may not like it—and they have to get a result if there is something we’re supposed to do. I spend a lot of time with the staff emphasizing the “Three R’s” as we call it: respect, responsiveness, and results. And on a daily basis, I’m either somewhere in Maryland on a series of visits, very accessible, or I’m in Annapolis with my staff.

‘Wayfair’ Prediction

Reed Smith: Do you have a prediction on how the Supreme Court will rule in South Dakota v. Wayfair?

Franchot: I think the Court is going to go back and read Quill and Bellas Hess, which I find to be completely mysterious opinions that completely flummoxed me, and I hope they come back in a decision that rectifies them and forces these behemoth internet companies that are not in Maryland to do the right thing and collect and remit to me the sales tax.

I am totally in favor of a Maryland sales tax on remote sellers. Primarily because—I’m not in favor of new taxes but this is not a new tax—it’s an existing tax. It is simply because technology is being applied in an unfair way, and it really affects and harms our local main street businesses.

Wayfair and all these other people need to do the right thing. Otherwise, I’m not sure what the future is. The alternative for the Court, as I understand it, is to kick it back to Congress. Good luck with that! It’s a huge issue for us. We submitted a brief along with many of the other states and we’re hopeful that it will squeak through and level the playing field for all businesses.

Gambling in Maryland

Reed Smith: You’ve always been a staunch opponent of gambling in Maryland. When we spoke five years ago, you predicted that people would regret its expansion in the state. Since then, several casinos have opened. Do you still hold the same views?

Franchot: Same views. I believe relying on gambling is a terrible way to fund education or anything else in the state budget. The state makes a big mistake partnering with these Las Vegas casinos, just on the social impact of gambling, which I find to be very much a negative. But I think that the insecurity of this funding source will be seen and experienced. I believe Virginia now officially recognized one of its Native American tribes. If, more likely when, they open a casino, that sucking sound is going to be people in Virginia leaving Maryland to go gamble at home. It’s a volatile form of funding for programs that need something much more stable and predictable, and it’s also a social negative. But I have made that case to the public and lost in several referendums, so right now I’m simply assessing the situation.

Not one dime of revenue was added to the education fund. It was sold as “slots for dots,” and it was a con job from day one. The legislature, after going along with these Las Vegas folks for so long, recently woke up to the fact that the revenue is not increasing the education budget, and they are now falling all over themselves to fix that, but it’s a pretty “Johnny- come-lately” cynical ploy by folks to get back on the right track and correct this. I opposed the original deal with these casinos and said that it was a fiscal fairy tale, that it was never going to increase education funding, and I was proven right by the fact that this year there is going to be a constitutional amendment on the ballot saying whatever we get from the casinos has to be added to—not included in but added to—the education budget.

Unclaimed Property

Reed Smith: You have been particularly vocal about unclaimed property over the last few years. Your website notes that one of your top priorities is reuniting Marylanders with their lost or misplaced property. Tell us a little about your unclaimed property initiatives. How about the audit side of things—does Maryland use third-party contract auditors?

Franchot: Yes. The whole program in my view has been a big success. We are holding $1.6 billion in unclaimed property for folks. We aggressively advertise and promote the program because we like returning money to people or to the proper heirs. To help ensure that all required property is turned over to us by the financial institutions, we do utilize [third-party contract auditors]. That’s something that’s proven to be very helpful. I’m all for that. I’m happy to pay a bit to help us reunite people with their property because otherwise the money may never get back to its rightful owners. Here’s the problem: we hand out $60 million a year back to people, which everybody appreciates because most of them have no idea they’re getting it, but we get another $70 million a year on top of it…it’s a massive program. I always hope we can reduce the $1.6 billion to $600 million, for example; I’m all for getting the money back to the people.

Continuing Tradition

Reed Smith: Could you tell us about your tradition of handing out coins?

Franchot: This was a Louie Goldstein tradition. He handed out gold coins with “God Bless You All Real Good,” and he would give them to everyone he met. During my first couple of years as Comptroller, people would ask me, where are your coins? Well, I decided that instead of the old plastic coins, I would make up medallions, at no expense to the taxpayers, and I give them out to Marylanders who make a difference. I’ve given them to governors, military veterans, first responders, teachers, community activists, and even young kids who have done acts of kindness and charity. The point is to recognize that we all can make a difference in our community and to thank people for their efforts. I’ve found that people are really touched to receive them, and I love meeting Marylanders and hearing their heartwarming stories.

Reed Smith: Thanks Peter. We look forward to seeing you at our next D.C. area state tax execs luncheon in Bethesda in June.

Franchot: Looking forward to it.

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