Monday, Nov. 19, 2007

New tax ‘huge disappointment’ for IT firms

Legislature expands sales tax to computer services

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Technology company executives were not happy campers Monday as news spread that the Maryland legislature had approved expanding the state sales tax to computer services, starting in July.

The measure passed during the special session that ended early Monday morning and was immediately criticized.

‘‘That was a huge disappointment,” said Marshall Micheals, president of Corporate Network Services, a Poolesville information technology business. ‘‘It was a quick fix, with no understanding of the broader implications.”

The special session was convened to help close an estimated $1.5 billion budget deficit. Other adopted measures affecting companies included an increase in the corporate income tax rate from 7 percent to 8.25 percent and a rise in the sales tax rate from 5 percent to 6 percent. A measure known as ‘‘combined reporting,” which would have changed the way companies that operate in numerous states file state income taxes, was dropped.

The expansion of the sales tax to computer businesses will cause a competitive disadvantage against those operating in other states that don’t have the tax, Micheals said. But it could help somewhat if companies based in other states that do business in Maryland are subject to the tax, he said.

Officials could not be reached Monday to comment on whether out-of-state companies that operate in Maryland will be subject to the tax.

The tax, which political leaders said would net about $200 million annually, will apply to businesses that offer facilities management, custom computer programming, system integration, installation and maintenance. But it will not cover Internet access, computer training and telecommunications.

The new tax will make Maryland less attractive for information technology companies and local businesses that depend on such services, said Roger Cochetti, director of U.S. public policy for the Computing Technology Industry Association, in a statement.

‘‘It will hamstring the state’s global competitiveness as companies — especially small ones — eschew needed IT tools because they cost too much,” he said. ‘‘Given that many computer services are delivered online, this tax will certainly encourage Maryland IT users to outsource their computer service needs to companies located in Reston, Va., or even Bangalore, India.”