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Business Leaders: This Tax Does Not Compute

BuBusiness leaders caught off guard by the late-emerging decision at last week's special legislative session to apply the sales tax to computer services say they'll be back for a fight when the General Assembly reconvenes in January.

"We'll try to overturn the tax," said Ronald W. Wineholt, vice president of government affairs for the Maryland Chamber of Commerce, whose members include about 20 computer companies.

Computer consulting, programming, hardware maintenance and software installation were previously exempt from the sales tax. But when lawmakers increased the sales tax from 5 to 6.percent, they also eliminated the exemption for computer services.

The industry was an easy target for lawmakers who approved a $1.4.billion tax package during the three-week special session to close a budget deficit: Taxing computer services could generate as much as $200.million a year from an industry with little clout in Annapolis. Public outcries banished landscaping, gym memberships, video arcades and other services with strong lobbies from the sales tax expansion proposal.

"There was never an adequate public hearing on this," Wineholt said of taxing computer services. He called the tax "a stake driven through the heart of high-tech" business in Maryland.

The repeal effort is likely to get attention, but its chances of success seem slim, given the amount of money involved.

"If there are some issues that need to be dealt with during the regular session, I'm sure the governor would be willing to consider them," O'Malley spokesman Rick Abbruzzese said. But he quickly questioned the General Assembly's appetite for revisiting a tax package that most lawmakers want to put behind them.

By Phyllis Jordan  |  November 25, 2007; 9:48 AM ET
Categories:  Lisa Rein  
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Comments

By far, the main reason that the computer services tax passed was because it was dropped into the tax bill at the last moment. Had the legislature added a tax on landscaping, gym memberships, video arcades and other services without adequate time for a public hearing, those taxes, too would have passed.

In any case, it's unlikely that the state will collect anywhere near $200 million by taxing computer services. The big guys -- companies that spend a lot on computer services -- will simply move their operations out of state. There is nothing easier to transport than computer programming and computer consulting services; just look at all of the work that is being outsourced to India. For the most part, the tax will be paid only by small businesses and home computer users. Just watch -- 6 months from now, the news will come out that the computer tax is bringing in only 25% of the amount that was anticipated.

Posted by: Tax Payer | November 25, 2007 11:59 AM | Report abuse

I moved my one man computer consulting shop to Alexandria. Why on earth would I give up another six percent of my income? O'Malley is a liar, a flip-flopper (think slots) and a tax and tax and tax and spender.

Posted by: meebee seebee | November 25, 2007 3:25 PM | Report abuse

I am not sure why the computer industry was exempt from sales tax in the first place. Seems only fair that they should pay their fair share of taxes just like other industries.

Posted by: steven09 | November 25, 2007 4:00 PM | Report abuse

So people will move the office space, the jobs, and their homes. Just what our depressed real estate market in MD needs. Maryland, if you have an idea we will tax it.

Posted by: lawrence | November 25, 2007 6:07 PM | Report abuse

Steven, the issue is that other services are not charged sales tax. Sale of goods is taxed, but not, until now, sale of services. And the General Assembly is taxing just computer services, not services of lawyers or accountants or gardeners or physicians or massage therapists or appliance repairmen or any other service providers.

Posted by: Programmer in MD for now | November 25, 2007 6:30 PM | Report abuse

steven09 - The computer industry is no more exempt from taxes than any other industry. Historically, only physical goods have been subject to sales tax in Maryland. With few exceptions, services have not been taxed in Maryland. What is new is that the legislature decided to single out computer services as a service to be taxed.

The question is why only *computer* related services? Why not the endless other types of consulting services? Why not tax home appliance repair services? Why not tax pet sitting services? Why not tax boat repair services? How about taxing other electronic equipment repair services?

The fact is that the legislators chose the computer consulting service because it was an easy target, and that's the only reason. After all, do computer consultants burden the state in some way? Do they cause public health issues or cause the state to incur education expenses that would not otherwise be incurred? Does computer consulting increase public safety expenditures? Of course not!

What the legislators didn't consider is that computer services are *very* easy to perform remotely, so buyers will choose the lowest cost provider, not the nearest providers. The only service that cannot be performed remotely is hardware repair, but hardware repair is actually not that much of a revenue producer out of the total picture.

Posted by: Tax Payer | November 25, 2007 6:31 PM | Report abuse

Oh what a brilliant move from Gov. O'Taxey. I'm sure he'll pass the buck on the blame, but he called the special session and claims that he forged the consensus. This is a stupid tax that Michigan and I think it was TN just repealed because it was hurting them so bad!

Posted by: J | November 25, 2007 7:23 PM | Report abuse

The computer tax passed because the legislators who represent the areas where such services are intensive --read Montgomery County--were not doing their job, save the Kramers and Simmons.

Why wasn't the Maryland Chamber of Commerce out front in opposing the 20% increase in the state sales tax when the internet and Delaware have NO sales tax?

Posted by: Robin Ficker of Robin Realty | November 26, 2007 1:46 AM | Report abuse

The computer services tax will create an economic catastrophe for Maryland. The headline for the tax should be "Maryland to High Tech Community: Drop Dead." The tax funds will never be collected (because any business seriously affected by it will either restructure to avoid it or move out of state), but the existence of the tax will make Maryland one of the most technology-hostile business venues in the world.

The key to the catastrophe is the fact that an enormous fraction of Federal subcontracting will be subject to the tax. That will create an incentive for the prime contractors to move away. Areas affected include the I-270 corridor, the US-29 corridor, the area around NASA Goddard, the area around NSA (including both Laurel and BWI airport), the area around Patuxent River Naval Air Station, and any area potentially affected by an influx of contracting due to BRAC (such as Aberdeen).

In addition, say goodbye to bioinformatics and high-tech manufacturing (which may include places like the General Motors transmission plant, if they outsource their computer work to focus on their core business).

Many of the companies in high-tech incubators will be affected, discouraging high-tech start-up investment in Maryland.

However, there will be some positives. Traffic congestion will be reduced except on commuting routes to out-of-state employment (because of the outflow of high tech businesses from Maryland), and there will be a lot of empty office space for locating tanning salons (that avoided being taxed).

Posted by: Stan Klein | November 26, 2007 11:59 AM | Report abuse

Again folks, I'm no fan of new taxes, but lets not push the panic button.

BRAC is moving 20,000 new federal jobs to Maryland from DC and VA over the next three years.

Maryland housing prices are still rising (or steady), while prices in parts of NoVa are in freefall.

If anything, Maryland's problem is uncontrolled growth, not a loss of growth.

Just putting things in perspective.

Posted by: Donny | November 27, 2007 1:21 PM | Report abuse

Donny,

Growth = increased tax base = more money for the state.

So then, even though you state that you're no fan of new taxes, you're saying it's OK that O'Malley has passed the largest tax increase in history while at the same time enjoying increased revenue through growth? That makes no sense at all other than the fact that you're once again trying to make excuses for an incompetent Governor.

Yes, it is time to panic.

Posted by: Taxed2death | December 2, 2007 10:30 AM | Report abuse

Does anyone know for sure how the tax will be levied? Is it based on your company's state of incorporation, your base of operations or where the service is delivered?

Posted by: SmBizOwnerJim | December 3, 2007 5:39 PM | Report abuse

I'm an individual who literally was dragged into doing some consulting for a company in California after I left my last employment. My administrative burden is relatively low - charge enough to cover self-employment tax and benefits and report it on a 1099 the next year and on Estimated Taxes. I'm now going to be paying income tax, self-employment tax and sales tax on that labor? And file for a tax ID and sales tax license? And report the sales tax... Tomorrow I call a Realtor and start the process to move out of the state.

Posted by: msj | December 9, 2007 12:52 PM | Report abuse

msj,I'm with you completely. I've in my small way helped shape the internet and create this community's (montgomery) lovely tech sector-- and I love the area! Born and raised here, lived here my whole life.... Being self-employed is enough of a logistical nightmare (health insurance, self employment tax, billing, etc), add another bout of paperwork and another SIX PERCENT off of my bottom line, and I'm gone. As a work-from-home consultant, I use about ZERO of the services my tax dollars provide to everyone else, as is.

And I've got new people moving in on all sides of me, creating incredible congestion when I do actually leave my computer and the house to get groceries. Yet my taxes are being increased across the board, and now I'm being targeted DIRECTLY even.

I'm outta here, I've had enough. This place can go to the birds.

Posted by: matt | January 7, 2008 1:40 AM | Report abuse

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