Repeal sought for computer tax

Critics say levy will put Md. firms at a disadvantage

December 09, 2007|By Andrew A. Green | Andrew A. Green,Sun reporter

Technology companies are pushing for a repeal of the computer services tax that the Maryland General Assembly approved last month, saying it will devastate a vital and growing sector of the economy.

"This sales tax on computer services is a nutty idea," said Chet Thaker, chief executive officer of TeleBright, a Rockville-based telecommunications software company with 20 employees. "It is dealing an effective setback, even a competitive disadvantage, to Maryland-based software companies like us."

The state's business community got hit with higher corporate income taxes and other measures critics say could make Maryland less competitive. But the tech tax -- which was not part of Gov. Martin O'Malley's legislative package and which got little public discussion during the recently concluded special session -- has become a focal point of opposition.

The Tech Council of Maryland, the Maryland Chamber of Commerce and other groups say they will lobby lawmakers and mount a publicity campaign in hopes of repealing the tax, which is expected to generate about $200 million annually, when the General Assembly returns in January. Lawmakers say they'll listen, but they don't hold out much encouragement.

"I think we'd be willing to look, but without overwhelming new data or evidence, I doubt we'd be willing to change," said Sen. Ulysses Currie, the Prince George's County Democrat who chairs the Budget and Taxation Committee.

Maryland's extension of the sales tax to computer services is part of a $1.3 billion package of tax increases that lawmakers approved to help close a projected budget shortfall and to add millions in new spending for transportation, health care and the environment. O'Malley and legislators have cut hundreds of millions in spending, and more cuts are expected in January.

Last month, the legislature increased the state's sales tax from 5 percent to 6 percent, effective Jan. 3. The new computer services tax is slated to take effect July 1 and expires after five years.

Comptroller Peter Franchot's office is starting to develop regulations for how the tax will be administered and identifying companies that will be affected.

O'Malley spokesman Rick Abbruzzese said Monday that taxing computer services wasn't the governor's idea -- he proposed extending the sales tax to real estate management, tanning, massage therapy and health club memberships, only to have lawmakers nix those ideas. But, Abbruzzese said, finding a way to make up for the revenue the computer services tax would generate won't be easy.

"Any discussion needs to include the fact that [repealing the tax] would require other choices: raising other taxes or making $200 million in specific cuts, on top of the $550 million we're already cutting," Abbruzzese said.

Unlike most other parts of the tax package, the computer services tax got little public vetting. Support for the proposal only coalesced in the final hours of the legislative session, effectively giving the industry no chance to object.

"I feel like I got into a ring and got smacked around without any warning, without any chance of a hearing, any chance of a discussion -- just boom, here it is," said Larry Letow, who owns Convergence Technology Consulting, a 30-person systems integration company in Glen Burnie.

The result of the rush to enact the tax will be a levy that is impossible to enforce, opponents say. John Nyland, IBM's senior executive in Maryland, said much will depend on whether the tax will apply to Maryland consumers buying services from companies in neighboring states or vice versa.

"If Maryland consumers have to pay the tax to in-state companies but not when they hire out-of-state companies to do that work, it puts the Maryland tech companies at a disadvantage," Nyland said.

Julie Coons, chief executive officer of the Tech Council of Maryland, said Connecticut's computer services tax has been fraught with disputes over its enforcement. She said two other states, Pennsylvania and Florida, approved similar taxes but quickly repealed them in the face of administrative difficulties.

Representatives of those three states say that's not exactly what happened.

Connecticut has had a 1 percent tax on computer services for nearly 20 years to go along with its general sales tax, which is 6 percent, said Sarah Kaufman, a spokeswoman for that state's Department of Revenue Services. Most of the disputes with business have been over which services should be taxed at 6 percent and which at 1 percent, she said. That wouldn't be an issue in Maryland, where all services would be taxed at 6 percent.

Stephanie Wyeant, a spokeswoman for the Pennsylvania Department of Revenue, said that that state had a computer services tax in effect from 1991 to 1997. She said the state was able to collect revenue from the tax effectively, but that it was repealed after lobbying from businesses that complained that it was being applied to transactions between affiliated businesses.

Florida's experiment with the computer tax was the most short-lived. A sales tax on computer, legal, construction, accounting and other services lasted just six months.

Mark Zych, director of technical assistance and dispute resolution for the Florida Department of Revenue, said the problem wasn't that the state couldn't figure out how to administer the taxes -- collections actually came in higher than predicted. It was that the list of new services subject to the tax included advertising, Zych said, and ad companies mounted an extremely effective publicity campaign.

"The advertisers basically put the heat on us," said Zych, who was involved in the 1987 tax reform. "It just became a political issue."

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