Ax the Tech Tax coalition planned

State technology leaders are joining thousands of business owners and associations across Maryland to repeal a sales tax on the computer services industry that was passed during the legislature's special session.

Officials from the Tech Council of Maryland and the Annapolis-based Maryland Chamber of Commerce have been coordinating the coalition over the past couple of weeks. They said business owners will be hurt by the tax along with any consumer who hits a computer key.

And now they even have the backing of state Comptroller Peter Franchot, who said the sales tax expansion will have to be repealed because it is difficult to define and enforce. The experience of other states shows that by the time a government figures out what they need to tax, those businesses have already fled its borders, Mr. Franchot said last week.

"Once they find it, it is moved out of the state," he said.

Lawmakers passed a computer sales tax to help erase the state's $1.5 billion deficit. The tax will take effect July 1 and state officials expect it to take in $200 million each year. It would apply to a range of services including computer-support services, disaster recovery and data-center support.

"The tax is going to be a concern to both providers of these services and the purchasers of these services," said Karen Syrylo, state taxation consultant for the chamber. "The businesses that are selling these services and the businesses that buy these services are very concerned about it because it to applies to everything that happens to a computer."

Julie Coons, chief executive officer of the state Tech Council, which has 550 members across the state said the state is taxing something fundamental on businesses ability to be competitive. The situation could lead to business migration from Maryland, she said.

"Defense contractors are going to be under extreme pressure to leave the state," she said.

Ms. Syrylo said the public hearing for the tax happened so fast that many business owners didn't get notice.

"There were a good number of people testifying but nowhere near the stories," she said.

Rick Abbruzzese, the governor's press secretary, said the proposal to tax the local computer industry was not originally part of the governor's plan, but is now an element of the "overall solution" to solve the state's fiscal issues.

The legislature did not accept the governor's original proposal to consider a tax on luxury services, such as tanning salons, so the computer sales tax was put in its place, he said.

"If we're going to revisit that, the conversation will have to include how we could come up with an additional $200 million in revenue, whether that's through new taxes or further reductions in state spending," said Mr. Abbruzzese, adding that the state is already cutting $550 million in next year's budget.

Warren Hansen, spokesman for the Maryland Comptroller's Office, said his office has formed a task force and is working out a plan to determine how the law will be carried out.

"Other states have had difficulty with this kind of tax," he said. "That's why we're soliciting input from so many people to make sure that we get good regulations that we can enforce very well."

Tech leaders said the tax will be hard to enforce. Pennsylvania and Florida have instituted similar taxes and later repealed them.

"It was hard to administer," recalled Kelly Lewis, president of the Technology Council of Central Pennsylvania and a former state representative. "It was kind of a form of double or triple taxation in some instances. They kept taxing it all the way through a resale of a product."

Bill Townsend, partner in law firm Fowler White Boggs Banker in Florida and former general counsel of the state's Department of Revenue, said the state's legislature repealed a sales tax on professional services in the late 1980s.

"What killed it was the advertisers," he said. "They went to the big media purchasers. For a while, we had no television commercials on the television. The screen would simply go blank."

Mr. Townsend predicted Maryland also will have trouble implementing and recording the tax especially for large corporations that may plan to buy a computer service and use it in several others states.

"Is the use wholly in Maryland? I think not," he said.

He also said the small computer business owner will suffer the biggest losses because larger corporations have the resources to go elsewhere.

"If I'm a multi-state entity I'm certainly not going to be using your local people anymore," he said.

Opponents of the law said it is so broad that it could apply to everything from grocery stores to dry cleaners with computerized systems.

"How does it apply to something that is licensed?" the tech council's Ms. Coons said. "What if I send an operating file to someone else? There are a whole range of questions. As it is, the 6 percent tax is on all businesses that purchase computer services."

Laura Willoughby, executive director of the Chesapeake Regional Tech Council, a non-lobbying group of 234 members, said there is still "some gray area" regarding which companies the tax will apply to in Anne Arundel County.

"There are some companies that are stuck in the middle," she said, referring to Zenoss, an Annapolis tech firm that provides open source software. "Their stuff is free. What's going to happen to them? How do they handle the tax?"

Ms. Willoughby said the concern moving forward will be the state's ability to attract more tech companies.

"If there's a networking company, why would they move to a state where now they're going to have to pay a sales tax?" she said.

Claire Louder, executive director of the West Anne Arundel County Chamber of Commerce, which is planning to join the coalition, said one of the hardest hit sectors here will be defense contractors that cannot pass the tax on to the government.

She said she expects those companies will have to find a way to cut somewhere else, whether it's service or quality. "Their margins are already very, very slim," she said.

Ms. Louder said she is encouraging her members to contact legislators about the tax, but added that she too is unclear about exactly who will be affected.

"I'm concerned about the fact that this wasn't thought through and tested," she said. "No one knows what this tax is because no one thought it through."

Locally, the tax would affect businesses like Datacare Inc., a small West Street business that maintains computers and networks for individuals and small to medium-sized businesses. Owner Rich Stewart said he doesn't expect to lose customers, adding the tax will create an "administrative nightmare" and force him to redesign his entire accounting system.

My PC Guy, a Glen Burnie computer services business that brings in $1 million in sales annually, would also be affected. Charlie Mello, chief operating officer, said he will have no choice but to pass the 6 percent increase on to customers and that it could affect his ability to hire a new highly trained employee. He also questioned whether implementing such a tax is worth the cost.

"The whole tax structure is narrow(ly) focused," he said. "Are we that affluent? Our margins are not that great."