Maryland tech companies savor hard-earned repeal

Computer services companies coalesced, pressuring lawmakers into about-face on tax

The fight ‘‘was worthwhile but anything but easy,” said John Eckenrode, president of Catonsville computer services company CPSI and co-founder of the Maryland Computer Services Association, which formed to lobby to repeal the tax.

‘‘If there is any object lesson, it is to get yourself a good publicity team, a good grass-roots team, a good lobbying team and get your fundraising lined up,” said Eckenrode, who said his group raised more than $100,000 to fight the tax.

He had never done anything like it before — and said he hoped never to do it again.

In November, the computer services industry was caught off-guard when the legislature, in a special session called to close a $1.5 billion state budget shortfall, extended the state’s sales tax, which was raised from 5 percent to 6 percent, to cover computer services. The move, expected to generate $200 million in tax revenues, was made with little public notice.

Riled, Eckenrode and others marshaled their industry’s forces, lobbying against the tax in the regular session, which ended April 7. Their efforts were rewarded when Gov. Martin O’Malley signed a bill that lawmakers approved in the final week to repeal the tax and replace it with a three-year ‘‘millionaire’s tax” of 6.25 percent on incomes of $1 million and more, plus $100 million in cuts in transportation and other programs.

One leader in the fight, Thomas Loveland, CEO of Mind Over Machines in Owings Mills and co-founder of the new lobbying group, said the tech tax was a shock at first. He and his peers were unsure where to go for help.

‘‘We don’t follow Annapolis. We were clueless,” Loveland said. ‘‘The joke around here was, ‘Hey, we’re lucky we didn’t just drive off to Indianapolis instead.’”

Damage on the horizon

Eckenrode said the tax, which was set to take effect July 1, ‘‘could have had a disastrous impact on our company, because we would not make any money — [it] would have cut into the profit margin dramatically.” His choices, he said, would have been to reduce staff, cut salaries or move out of state. CPSI, founded 23 years ago, now has 150 employees.

Robert Epstein, president of AboutWeb in Rockville, said many of his 57 employees were concerned about their jobs moving out of state.

Julie Coons, CEO of the Tech Council of Maryland, led an intense lobbying effort, first to stop the tax in the November session, and then to get it repealed in the regular session.

‘‘In this case, public policy went a little bit awry, and this is how the public policy process works,” Coons said. ‘‘In the end the good policymakers went back and made a change. It is democracy at work.”

The issue was also a top legislative priority of other business groups such as the Maryland Chamber of Commerce, Montgomery County Chamber of Commerce, Baltimore-Washington Corridor Chamber of Commerce and Hispanic Chamber of Commerce of Montgomery County.

Mobilizing the fight

Epstein said he was impressed with tech business community’s power in the fight.

‘‘Within a few months we mobilized a huge force,” Epstein said. ‘‘We had daily briefings through e-mails and the Net. ... We were able to mobilize what was called an impossible task in December.”

Sen. Jennie M. Forehand (D-Dist. 17) of Rockville, an Annapolis veteran who sponsored the repeal bill, said she had never seen such a successful turnaround on a major tax bill.

‘‘Not even in my 16 years in the House, on the Appropriations Committee,” she said.

After forming the coalition, the techies needed to ‘‘help the players already engaged,” Loveland said. ‘‘The Maryland Tech Council was tremendous. Through the council, our group learned what we needed to do and then our group was awesome.”

Most lawmakers rejected a repeal when the legislature convened in January, Loveland said. ‘‘They saw it as a third rail and a topic not to be discussed.”

He does not think the politicians fully understood the economic impact of taxing purchases of computer services. ‘‘It became all about educating them that this is a huge component for success in the economy.”

Several lawmakers helped turn the tide, Coons said, calling Sen. Robert J. Garagiola (D-Dist. 15) of Germantown ‘‘a tremendous quarterback. He worked this issue every day of the session.” Also, House Majority Leader Kumar P. Barve (D-Dist. 17) of Gaithersburg, who ‘‘led the fight out of committee and onto the floor and did a yeoman’s job.”

Lessons learned

‘‘There was a lot of awakening in this session to repeal the IT tax,” said Jorge Restrepo, board president of the Hispanic Chamber of Commerce of Montgomery County.

‘‘One of the lessons for the next session is that we have to have more information to our legislators to partner more closely on other initiatives — from their perspective for them to seek more input,” Restrepo said. ‘‘This tax was part of a tax package and with no hearings. Then we had to spend a whole session on it again.”

Loveland said he has gotten hundreds of e-mails of thanks and congratulations.

Epstein took his employees out to lunch at Chevy’s Fresh Mex to celebrate.

‘‘Now I can get back to business,” he said. ‘‘We want to expand the tech base in Maryland. All plans full steam ahead for growth ahead.”

This report originally appeared in The Business Gazette.