Wednesday, Jan. 9, 2008

Focus in 2008: Repeal computer tax

Health insurance, tighter spending are also legislative priorities

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With the 2008 General Assembly legislative session starting today, business organizations have at least one issue to rally around: repealing the 6 percent state sales tax on computer services passed late last year in a special session.

A coalition led by the Maryland Chamber of Commerce and the Tech Council of Maryland is organizing opposition against the tax. And an industry group called the Maryland Computer Services Association was also recently formed by business executives to lobby against the measure.

In addition to the computer services tax, issues such as budgetary restraint, health insurance, and education and transportation funding also figure to be hot topics during this year’s session.

The Maryland Computer Services Association, though formed only a few weeks ago, has received solid support from computer services businesses so far, said Tom Loveland, CEO and chairman of Mind Over Machines, who helped start the association. His 50-employee Owings Mills Web applications company, which also has a Bethesda office, made Inc. magazine’s annual list of the fastest-growing private companies last year, with revenues about doubling from 2003 to 2006 to $6.6 million.

If Mind Over Machines is forced to collect the new tax from out-of-state customers, company executives ‘‘will do whatever it takes to protect our out-of-state clients from this tax, including moving our headquarters,” said Loveland, who founded Mind Over Machines in 1989.

Several legislators have indicated they will file legislation this session to repeal the computer services tax, said Ronald Wineholt, vice president of government affairs for the Maryland chamber.

‘‘It was hastily adopted without a full public hearing,” Wineholt said. ‘‘We’re hoping that members of the General Assembly will reconsider that tax.”

Computer service companies employ about 68,000 people in Maryland, with an annual payroll of some $2 billion, according to the chamber. Imposing a sales tax on this industry will jeopardize jobs and make the state less competitive with neighbors such as Virginia, Wineholt said.

Repealing the tax before it becomes effective on July 1 is the Tech Council’s top legislative priority, said CEO Julie Coons.

‘‘It will have devastating effects if implemented, but there is time to correct this mistake,” Coons said.

The level of support for the repeal is significant, she said. ‘‘We have never seen such a strong response from members and partners in the business community,” Coons said.

The tax has been repealed in other states, where officials have found it difficult to answer questions such as where the computer services work was done when companies have out-of-state servers and offices.

Loveland shied away from predicting how likely a repeal would be.

‘‘Many of us in the industry were stunned when the computer tax was voted into law in the first place, so I’ve learned my lesson and won’t make any predictions about its repeal,” he said. ‘‘I’ll just say we’re doing everything we can to repeal the tax.”

Fiscal restraint,insurance priorities

The computer sales tax is not the only issue on business executives’ minds this session, which ends April 7, barring an extension.

Greater budgetary restraint, increased access to affordable health insurance for small companies and more money for higher education and transportation are also important, they say.

Last year’s special session was called to address an estimated $1.5 billion budget deficit caused by passing programs such as the Thornton education bill without proper funding, officials said. About $800 million in new taxes will be paid by businesses as a result, Wineholt said.

‘‘We will work to avoid causing a new state deficit,” Wineholt said. ‘‘[Public officials] have to do a better job at controlling projected spending increases.”

During the special session, legislators approved a program to offer small companies with two to nine employees subsidies for employees’ health insurance. That should be beneficial, but there is more that can be done, such as reforming the small-group health insurance program to limit mandated health benefits and increase plan flexibility, Wineholt said.

Another issue that could arise is increasing the fees for most businesses to file their annual reports in Maryland. A bill to raise that fee from $300 to $1,000 did not pass last year. The fee was last increased from $100 to $300 in 2003.

The Montgomery County Chamber of Commerce’s legislative agenda also includes supporting research and development tax credits, funding for the Rockville Science Center and Germantown Bioscience Center, new investment for transportation infrastructure along the Route 355 corridor to prepare for additional employees caused by the Pentagon’s Base Realignment and Closure plan, and changing the state’s small-business reserve program to allow more companies to participate.

More funding for biotechnology tax credits and the Maryland Technology Development Corp. is also important, Coons said.

The National Federation of Independent Business supports better access to health insurance for small businesses, while opposing attempts to repeal contributory negligence, pass new paid leave mandates and expand benefits such as unemployment insurance to part-time employees, said Ellen Valentino, Maryland director of that organization.

‘‘The efforts on contributory negligence might be more intensive this year than last year,” she said.

Maryland is one of a handful of jurisdictions in the nation — along with Virginia, Washington, D.C., North Carolina and Alabama — to use contributory negligence instead of comparative negligence, according to a report by the Glen Burnie law firm of Miller and Zois.

In Maryland, even if a plaintiff is determined to be only 1 percent at fault for injuries, he is denied damages, the report says. Most other states award damages according to the proportion that parties are found to be at fault.

‘‘The contributory negligence standard we use in Maryland is more harsh to injury victims and creates real challenges for Maryland personal injury lawyers seeking justice for their clients,” the Miller and Zois report says.

This report originally appeared in The Business Gazette.