New computer tax riles leaders
6 percent sales levy ‘will be disastrous,’ says chamber chairman
The new 6 percent sales tax on computer services has business leaders across Maryland up in arms.
The Tech Council of Maryland, as well as the Greater Bethesda-Chevy Chase and Maryland chambers of commerce, have made rescinding that tax a major priority for the legislative session that starts Jan. 9. Business leaders are urging their members to contact lawmakers and tell them to rescind the tax, which was adopted in the legislature’s recent special session.
‘‘That tax will be disastrous to a key industry in this state,” said Kevin Maloney, board chairman of the Bethesda-Chevy Chase chamber. ‘‘It could cause many companies to move from Maryland, or consider not setting up shop here.”
The tax, set to take effect in July, wasn’t the only increase passed by legislators to help close an estimated $1.5 billion budget deficit. The corporate income tax, general sales tax and cigarette tax will rise starting next month.
Virginia faces a deficit, but political leaders there have cut spending and not raised taxes, said economist Stephen Fuller. But Virginia’s deficit — projected at $641 million — is far smaller than Maryland’s.
‘‘Maryland didn’t have to raise taxes,” said Fuller, director of the Center for Regional Analysis at George Mason University in Fairfax, Va. ‘‘It’s unfortunate they took that approach. That sends a negative message that will reduce the competitive position Maryland has with Virginia.”
Maryland’s new state sales tax rate is still competitive with Virginia’s 5 percent rate, said Del. Brian J. Feldman (D-Dist. 15) of Potomac, chairman of the Montgomery County House Delegation.
Virginia applies its sales tax to groceries, which Maryland does not, he noted. In addition, Maryland does not apply the sales tax to prescription and non-prescription drugs as some states do, Feldman said.
As for the corporate rate, Virginia’s level at 6 percent is substantially lower than Maryland’s new one of 8.25 percent.
Some computerservices exempt
The computer tax will net about $200 million annually, according to a legislative analysis. The proposal was not part of Gov. Martin O’Malley’s original plan but was inserted by a Senate committee that did not schedule a hearing for computer company representatives to testify.
The tax will apply to businesses that offer facilities management, custom computer programming, system integration, installation and maintenance. It will not cover Internet access, computer training and data entry.
Those exempt computer services are the ‘‘low-tech” kind, not the high-tech type that take place in computer-related research, development and federal government subcontracting, said Stanley Klein, a principal of Open Secure Energy Control Systems LLC. Companies that contract out computer services, including the information technology and biotechnology companies that Maryland tries to attract, will be hit hard, he said.
Klein 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.
Insurance subsidiesfor small business
One element of last month’s legislative package that could benefit companies is subsidies to help small businesses provide medical insurance for employees.
The benefit could help as many as 37,000 small companies with from two to nine employees offset the cost of health insurance, Feldman said.
The program takes effect in July. The Maryland Health Care Commission and the Department of Health and Mental Hygiene are reviewing issues such as the application process and amount of subsidy per employee, a state spokesman said last week.
This report originally appeared in The Business Gazette.