Maryland Covertly Singles Out Computer Services For New Tax

December 17, 2007

We’ve already written extensively on Maryland’s recent tax hikes: income, sales, and cigarette tax rates will go up next month. Governor O’Malley’s original plan would have also extend the state sales tax to “luxury” services, including real estate management, landscaping, tanning, massage therapy, auto repairs, and health club memberships.

Lobbyists for each of those industries got the tax on them thrown out, but the computer services industry wasn’t so lucky. Those services will be hit with the new 6 percent tax starting July 1, 2008.

Transparent wouldn’t be the word to use in describing how the tax came about:

[T]he Budget and Taxation Committee…added the computer services tax to the package in the middle of the 21-day session without holding a hearing on the measure, citing time pressure.

The “lunch bunch” consists of senior members of Currie’s committee, who often meet privately before presenting proposals to other members of the panel. None of those interviewed would publicly identify the senator who suggested the computer services tax, which was included in a long menu of possibilities distributed by legislative aides.

Sen. Richard S. Madaleno Jr. (D-Montgomery), a freshman on the budget committee, said he did not know exactly how the tax came about. “You’d have to talk to someone who was in the backroom,” he said.

Executives from computer services companies said the episode has been a wake-up call to the ways of Annapolis, and several are now talking about trying to hire some of the state’s more powerful lobbyists before the session starts next month.

Nine states tax computer services, but 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.

That doesn’t shed too much light on the difference between services that will pay a 6 percent tax and services that will pay no tax, and there’s also ambiguity over whether Maryland residents hiring an out-of-state company will pay the tax or not. At least one company is already considering packing up and leaving the state:

[Stanley Klein, a principal of Open Secure Energy Control Systems LLC] said he and other executives at the Silver Spring developer of electric utility automation software are considering reorganizing or moving the company.

“This takes economic development into reverse,” he said.

The federal government’s immunity from state taxes does not extend to its contractors and subcontractors, which will force prime contractors to move out of state, Klein said.

Other states, such as Pennsylvania and Florida, have repealed the tax after finding it confusing to implement.

Singling out one politically unconnected service for taxation is poor tax policy, and the non-transparent manner in which it was passed makes it even worse. Now, lobbyists for the computer services industry are seeking to repeal the tax before it starts, but Maryland politicians will be reluctant, since it means foregoing $200 million a year in projected revenue:

“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.

More on Maryland’s tax hikes here.

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