Momentum Builds to Repeal Maryland Computer Services Tax

March 14, 2008

Last year, Maryland legislators proposed expanding the state sales tax to a number of services, including real estate management, landscaping, tanning, massage therapy, auto repairs, and health club memberships. While lobbyists for those industries were successful in halting those taxes, a last-minute backroom deal imposed the 6 percent tax on the computer services industry, effective July 1, 2008.

Only nine states tax computer services, because the industry is highly mobile and can move states easily if singled out for punitive taxation. Also, litigation has arisen in several states over the difficulty of separating "computer services" from other types of services. The Maryland version covers web design, facilities management, custom computer programming, data center support, systems integration, installation, and maintenance, but not Internet access, computer training, and data entry.

Yesterday, more than 200 Maryland business executives took to Annapolis, testifying to legislators and urging repeal of the tax:

John Eckenrode, president of Catonsville computer services company CPSI, told the Senate Budget and Taxation Committee that he's already had large corporate clients tell him they won't pay the extra 6 percent. Most computer firms, especially those that contract with the federal government, operate on very thin profit margins, he said.

"We're looking at a 90 percent cut in profitability starting in July," said Eckenrode, co-founder with Thomas Loveland of the Maryland Computer Services Association, a group formed late last year to lobby for tech concerns. "We are in desperate trouble in our business."

Many corporate executives are being courted by officials in Virginia, Delaware and other surrounding states to move. Pennsylvania repealed its computer services tax after six years in 1997, while Virginia also does not have such a tax. Delaware's gross receipts tax for computer services is less than one percent, while Washington, D.C., has a 5.75 percent tax on only a few of the computer services in Maryland's law.

Repeal supporters got a boost when Maryland Gov. Martin O'Malley sided with them yesterday:

The governor, a Democrat, said it was unfair to expand the sales tax to just one industry and echoed the sentiments of many lawmakers who believe the application of the levy was not thoroughly vetted when it was approved in November.

"I've never been a big fan of this computer tax," O'Malley told reporters after an appearance in Dundalk.

(O'Malley signed the tax into law.) Unfortunately, the Governor advocates another income tax hike as a way to keep the revenue from the tax, so it may end up being a tax shift instead of a tax repeal.

More on Maryland here.

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