Wednesday, March 5, 2008

Executives say firms may leave state if computer services levy is not repealed

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Brian Lewis⁄The Gazette
‘‘This issue is making me look at not only other states, but to countries like India,” says Robert Epstein, president and co-founder of AboutWeb LLC of Rockville, of the state’s new computer services tax.
A few years ago, Robert Epstein moved his information technology business from Virginia to Rockville — a key reason being that he wanted to more directly support his native state.

But after the General Assembly passed a 6 percent sales tax on computer services in what many tech executives said was an underhanded and unfair way last fall, Epstein is considering another move — this time outside of Maryland.

‘‘I’m a lifelong Maryland resident. I went to the University of Maryland ... I’m glad my tax money is going to my state,” said Epstein, president and co-founder of AboutWeb LLC, which he has seen grow to 52 employees, with more than half of those in Maryland. ‘‘But this issue is making me look at not only other states, but to countries like India.”

Epstein is not alone. At a lobbying day in Annapolis last week organized by groups such as the Maryland Chamber of Commerce and Tech Council of Maryland, other executives expressed similar notions about moving their company — or certain work — out of Maryland if the legislature does not repeal the tax this session.

Several hundred executives came from around the state to lobby legislators to repeal the law. The group included about 35 business people who rode over on a bus organized by the Montgomery County Chamber of Commerce.

Economic development officials from Delaware and Pennsylvania have been openly urging Maryland executives to move to their states, said Thomas W. Loveland, CEO of Mind Over Machines, a 50-employee Web applications company in Owings Mills. Before a standing-room-only crowd of more than 150 at the Maryland Inn, the co-founder of the Maryland Computer Services Association held up recent letters from officials of those states making such pitches.

Other executives said they are also being courted by officials in Virginia and Washington, D.C. Pennsylvania repealed its computer services tax after six years in 1997, while Virginia also does not have such a tax, said Karen Syrylo, a tax consultant for the Maryland chamber. Delaware’s gross receipts tax for computer services is less than 1 percent, while Washington has a 5.75 percent tax on only a few of the computer services in Maryland’s law, she said.

‘‘We don’t want to move,” said Loveland, whose company has made Inc. magazine’s annual list of the fastest-growing private companies, with revenues roughly doubling from 2003 to 2006 to $6.6 million. ‘‘But many of us are having to consider it.”

Slim profit margins

A key reason is that many computer services companies contract with government agencies and operate on slim profit margins, Epstein said. His company maintains one office in Vienna, Va., and two in North Carolina.

‘‘This is a sales tax on our gross, not our net,” Epstein said. ‘‘If we had to pay this, on some contracts we could essentially lose money.”

Barbara Keating, founder of Frederick technology services company Computer Frontiers and a Montgomery chamber board member, said she, too, would have to look at other options if the tax is not repealed. Her company has several offices in Africa.

‘‘I just came back from Africa, where I promoted Maryland as a good place for IT companies there to do business,” Keating said. ‘‘But I’m having to rethink that.”

Other Maryland-headquartered businesses considering a move, a hiring freeze or using offshoring services because of the tax include Silver Spring software developer Open Secure Energy Control Systems LLC.

State officials say the tax is expected to rake in about $200 million annually — a figure many executives question when flight and diversion of tech services to India and other locations are factored. Collections are slated to start in July. There are more than a dozen bills to repeal the tax, and hearings in the House and Senate are set for March 12 in Annapolis. The end of the regular session is April 7.

With prominent officials such as Gov. Martin O’Malley (D) and Senate President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach on record as opposing a repeal, supporters — including many legislators — acknowledge it will be an uphill battle.

‘‘Ninety percent of what gets done here happens in the last 25 days,” said Senate Minority Leader David R. Brinkley (R-Dist. 4) of New Market, who has opposed the tech tax since it surreptitiously popped up in a late-night meeting of the Maryland Senate Budget and Taxation Committee during November’s special session. ‘‘So a lot can happen.”

This report originally appeared in The Business Gazette.