Tech firms savor hard-earned tax repeal

Computer services companies coalesced, pressuring lawmakers into about-face

The fight ‘‘was worthwhile but anything but easy,” said John Eckenrode, president of Catonsville computer services company CPSI and co-founder of the Maryland Computer Services Association, which formed to lobby against the tax.

‘‘If there is any object lesson, it is to get yourself a good publicity team, a good grass-roots team, a good lobbying team and get your fundraising lined up,” said Eckenrode, who said his group raised more than $100,000 to fight the tax.

He had never done anything like it before — and said he hoped never to do it again.

In November, the computer services industry was caught off-guard when the legislature, in a special session called to close a $1.5 billion state budget shortfall, extended the state’s sales tax, which was raised from 5 percent to 6 percent, to cover computer services. The move, expected to generate $200 million in tax revenues, was made with little public notice.

Riled, Eckenrode and others marshaled their industry’s forces, lobbying against the tax in the regular session, which ended Monday. Their efforts were rewarded when Gov. Martin O’Malley signed a bill that lawmakers approved in the final week to repeal the tax and replace it with a three-year ‘‘millionaire’s tax” of 6.25 percent on incomes of $1 million and more, plus $100 million in cuts in transportation and other programs.

One leader in the fight, Thomas Loveland, CEO of Mind Over Machines in Owings Mills and co-founder of the new lobbying group, said the tech tax was a shock at first. He and his peers were unsure where to go for help.

‘‘We don’t follow Annapolis. We were clueless,” Loveland said. ‘‘The joke around here was, ‘Hey, we’re lucky we didn’t just drive off to Indianapolis instead.’”

Damage on the horizon

Eckenrode said the tax, which was set to take effect July 1, ‘‘could have had a disastrous impact on our company, because we would not make any money — [it] would have cut into the profit margin dramatically.” His choices, he said, would have been to reduce staff, cut salaries or move out of state. CPSI, founded 23 years ago, now has 150 employees.

Robert Epstein, president of AboutWeb in Rockville, said many of his 57 employees were concerned about their jobs moving out of state.

Karen Syrylo, a tax consultant for the Maryland Chamber of Commerce, said, ‘‘We were sure that it would take business out [of state], both the sellers of these services and the purchasers of these services.” Loveland said the tax would devastate the entire industry.

Julie Coons, CEO of the Tech Council of Maryland, led an intense lobbying effort, first to stop the tax in the November session, and then to get it repealed in the regular session.

‘‘In this case, public policy went a little bit awry, and this is how the public policy process works,” Coons said. ‘‘In the end the good policymakers went back and made a change. It is democracy at work.”

The issue was also a top legislative priority of other business groups such as the Maryland Chamber of Commerce, Montgomery County Chamber of Commerce, Baltimore-Washington Corridor Chamber of Commerce and Hispanic Chamber of Commerce of Montgomery County.

Mobilizing the fight

Loveland said the tax would not have hurt his company as much as others, because it deals mostly with government contracts and out-of-state clients.

‘‘But this goes deeper. It is in my bones,” he said. ‘‘I don’t want to live in a state that does this. I want to live with the cool people.”

This week, Epstein said he was impressed with tech business community’s power in the fight.

‘‘Within a few months we mobilized a huge force,” Epstein said. ‘‘We had daily briefings through e-mails and the Net. ... We were able to mobilize what was called an impossible task in December.”

Sen. Jennie M. Forehand (D-Dist. 17) of Rockville, an Annapolis veteran who sponsored the repeal bill, said she had never seen such a successful turnaround on a major tax bill.

‘‘Not even in my 16 years in the House, on the Appropriations Committee,” she said.

Educating the lawmakers

After forming the coalition, the techies needed to ‘‘help the players already engaged,” Loveland said. ‘‘The Maryland Tech Council was tremendous. Through the council, our group learned what we needed to do and then our group was awesome.”

Most lawmakers rejected a repeal when the legislature convened in January, Loveland said. ‘‘They saw it as a third rail and a topic not to be discussed.”

He said legislators generally adopted the mantra: ‘‘So how else will we get $200 million?”

‘‘We never answered,” he said. ‘‘That’s not our job.”

He does not think the politicians fully understood the economic impact of taxing purchases of computer services. ‘‘It became all about educating them that this is a huge component for success in the economy.”

‘‘I bet they are going to raise a ton more revenue than they realized because the jobs are going to grow in the state,” Epstein said. ‘‘I have added five or six jobs since the controversy started.”

As late as April 2, five days before the end of the session, Loveland and his colleagues still thought the repeal was dead. That day, O’Malley, who had earlier signaled his willingness to repeal the tax, announced a tentative deal.

Several lawmakers helped turn the tide, Coons said, calling Sen. Robert J. Garagiola (D-Dist. 15) of Germantown ‘‘a tremendous quarterback. He worked this issue every day of the session.” Also, House Majority Leader Kumar P. Barve (D-Dist. 17) of Gaithersburg, who ‘‘led the fight out of committee and onto the floor and did a yeoman’s job.”

Lessons learned

‘‘There was a lot of awakening in this session to repeal the IT tax,” said Jorge Restrepo, board president of the Hispanic Chamber of Commerce of Montgomery County.

‘‘One of the lessons for the next session is that we have to have more information to our legislators to partner more closely on other initiatives — from their perspective for them to seek more input,” Restrepo said. ‘‘This tax was part of a tax package and with no hearings. Then we had to spend a whole session on it again.”

H. Walter Townshend III, president and CEO of the Baltimore-Washington Corridor Chamber of Commerce, said the episode was ‘‘an excellent opportunity for businesses to come together and collaborate.”

‘‘It is something the legislature hasn’t quite seen until this session,” Townshend said. ‘‘This augurs well for the future for the business community to get messages unified.”

Forehand observed: ‘‘I think we have a new community of well-informed people now.”

Savoring the moment

By midweek, the repeal leaders were rejoicing.

‘‘It’s been 120 days,” Loveland said, ‘‘but who’s counting? It was absolutely worthwhile.”

Loveland said he has gotten hundreds of e-mails of thanks and congratulations.

Eckenrode acknowledged that even though he is not partial to schmoozing, he spent ‘‘just a few hours” Wednesday at a ‘‘sort of party,” walking around State Circle to thank lawmakers and others.

Epstein took his employees out to lunch at Chevy’s Fresh Mex to celebrate.

‘‘Now I can get back to business,” he said. ‘‘We want to expand the tech base in Maryland. All plans full steam ahead for growth ahead.”