Tech tax will apply broadly under new rules

Friday, March 21, 2008

Tech tax will apply broadly under new rules

All providers face levy on in-state services

by Kevin J. Shay | Staff Writer

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Both out-of-state and in-state providers of computer services in Maryland will be subject to a new 6 percent sales tax starting in July, according to a draft of regulations released by the Comptroller’s Office.

Thus, Maryland customers cannot avoid the tax by turning to out-of-state providers. And local computer businesses threatening to move out of state cannot avoid the tax on services they provide to their Maryland clients, unless those clients also move out of state.

‘‘If a client is in Maryland, that service would be subject to the tax,” said Joseph Shapiro, a spokesman for Comptroller Peter V.R. Franchot (D).

Executives have been concerned that the new tax would put Maryland at a disadvantage against Virginia and other states.

Still, many executives — who spoke out last week at two legislative hearings — would rather see the tax repealed. Lawmakers are considering how to make up an estimated $200 million annually if they do as opponents wish and ‘‘ax the tax.” The legislature’s regular session ends April 7.

The regulations make it clear that the tax will affect all businesses in Maryland, not just technology companies, said Thomas W. Loveland, CEO of Mind Over Machines, a 50-employee Owings Mills Web applications company. It will also affect individuals with home computers and nonprofits that don’t have sales tax-exemption certificates.

‘‘A lot of other businesses should be joining us,” said Loveland, co-founder of the Maryland Computer Services Association and a leader in a campaign against the tax. ‘‘Nothing has changed. This tax will still drive jobs offshore if it is implemented. Companies will strive to pay a smaller amount for IT services, and that would include looking for cheaper alternatives offshore.”

Repeal advocates gained a key ally last week when Gov. Martin O’Malley (D), who signed the tax into law last year, reversed course and said he opposed the tax and hoped legislators would seek alternatives such as raising income taxes on the wealthiest Marylanders. Julie Coons, CEO of the Tech Council of Maryland, said she had a ‘‘productive meeting” on the matter with O’Malley last week.

The Tech Council supports a bill filed by Sen. Verna L. Jones (D-Dist. 44) of Baltimore to increase personal income taxes on residents earning more than $750,000 annually from 2008 until 2012, as long as the added revenues are used to help repeal the tech tax. That bill was part of last week’s hearing in the Senate Budget and Taxation Committee but hadn’t made it out of the committee as of Thursday.

‘‘But we’re also open to other ideas,” Coons said.

Other bills — none of which have yet made it out of committee — propose making further budget cuts and raising gasoline and alcohol taxes.

Some chambersoppose income tax bill

The Maryland Chamber of Commerce — another key group that has lobbied against the tech tax — opposes an income-tax increase. Chamber officials said in a statement that it trades ‘‘one bad tax for another.” Many people in those top tax brackets are small-business owners and executives at large companies who could move those businesses out of Maryland, they said.

The Montgomery County Chamber of Commerce, Montgomery County Executive Isiah Leggett (D) and County Council President Michael J. Knapp (D-Dist. 2) of Germantown also oppose raising personal income taxes.

The Greater Baltimore Committee supports a ‘‘temporary” increase in income taxes on the wealthiest residents, lasting not more than three years, if the only alternatives are that and the tech tax. The Greater Baltimore Technology Council also threw its weight behind the income-tax measure after a survey of members last week showed that 93 percent favored the income-tax hike over the tech tax.

Another poll released by the Tech Council and conducted by Gonzales Research and Marketing Strategies late last month found general opposition to the levy across party lines: 54 percent of Democrats, 64 percent of Republicans and 62 percent of independents.

The switch by O’Malley on the tech tax repeal is a sign that the mood among lawmakers is changing, said Marshall Micheals, president of Corporate Network Services, a Poolesville information technology business. But if that doesn’t result in repealing the tax, Micheals’ company would consider a move, he said.

‘‘We are about to open another office in Florida,” Micheals said. ‘‘It wouldn’t be hard for us to move all of our operations there.”

Regulation:‘No surprises there’

The new guidelines say that services on home computers — even if they aren’t used for business purposes — are subject to the tax. If a vendor does not collect the tax, the buyer is responsible for paying the levy to the state.

Those services include custom computer programming; disaster recovery; data processing and storage; Web hosting and design; and hardware and software installation and maintenance, except in some cases, such as a vehicle’s computer system. Services that will not be subject to the tax include downloads of videos or music, computer training, Internet access and data entry.

Franchot, who has publicly opposed the computer tax, has an obligation to broadly interpret the law as it was written by legislators, Coons said.

‘‘There are no surprises there,” she said. ‘‘It’s a reflection of the legislation that is broad.”

The regulations also make it clear that pre-negotiated contracts will be subject to the tax if payments are made after July 1, Loveland said. ‘‘That is a company killer,” he said.

Subcontractors will also be taxed, which will hurt many Maryland businesses, Coons said. ‘‘Companies might do more of the work in-house, rather than subcontract that out,” she said.

Some parts of the regulations can get confusing. Maryland companies that perform work for clients in other states will not have to collect the tax on a sale made to a customer physically located outside of Maryland, ‘‘unless the vendor is aware or is made aware of the percentage of the service to be allocated to Maryland,” Shapiro said.

As for companies buying tech services used in several states, the regulations say that if the ‘‘benefit of the service is received both within and outside the state, the service is taxable to the extent it is received within Maryland. A multi-state buyer may use a reasonable method for allocation that is supported by business records.”

Coons and Loveland said they are optimistic about the repeal’s chances.

‘‘We have made tremendous progress,” Coons said. ‘‘But this may come down to the final days of the session.”

New computer tax

Starting July 1, many computer services performed in Maryland will be subject to a 6 percent sales and use tax, including the following:

Computer facilities management and operation

Custom programming

Computer system planning and design that integrates computer hardware, software and communication technologies

Computer disaster recovery

Data processing, storage and recovery

Hardware and software installation, maintenance and repair, except on tangible personal property that includes hardware or software as a component part, such as a vehicle’s computer system.

Web hosting and design

Among the servicesnot subject to the tax:

Downloads of videos or music

Computer training

Internet access

Data entry

Accounting-related

Telecommunications

Banking transactions

Other parts of the law:

If the vendor does not collect the tax, the buyer is responsible for remitting it to the state.

Work on home computers is subject to the tax.