Computer Services Firms Want Sales Tax Repealed

The idea surfaced in a private meeting of a group of Maryland senators known as the "lunch bunch," coming just as other tax proposals were meeting steadfast resistance:

Why not apply the state sales tax to computer services?

The provision, raised amid the hectic special session of the General Assembly last month, promised to raise about $200 million a year toward closing a budget gap of at least $1.5 billion. And the tax would have limited impact on working-class families, who were being pinched by other proposals on the table.

The idea, which soon thereafter became Maryland law, is now drawing the ire of business groups, technology associations and computer executives caught flat-footed by its passage three weeks ago. They are scrambling to hire top-notch Annapolis lobbyists and persuade lawmakers to repeal the tax when they convene next month.

"Our members are understandably shocked," said Julie Coons, chief executive of the Tech Council of Maryland, part of a coalition pushing for the tax's repeal when the General Assembly session starts Jan. 9. "This is essentially taxing Maryland firms for trying to stay competitive in this regional, national and increasingly global economy."

Under the provision, the state will apply its 6 percent sales tax to an array of computer services, including custom programming, data processing and hardware maintenance.

Individuals will be subject to the tax when they call on such services as the Geek Squad for help with their home computers. But most of the revenue from the tax is expected to come from Maryland businesses that contract with firms for their computer needs. No other states in the region impose a similar levy.

The tax is set to take effect July 1, which provides a window of opportunity for opponents before collections start. Most other measures included in a $1.4 billion tax package -- increases in sales, tobacco and corporate income taxes, as well as in the income tax rate for high-end earners -- commence Jan. 1.

Leading lawmakers interviewed last week expressed ambivalence about the passage of the computer services tax, but most suggested that its full repeal is unlikely, given the large amount of money it could generate for the state.

House Majority Leader Kumar P. Barve (D-Montgomery) said he is "not a big fan" of the tax but doubted that "the whole thing would be repealed."

Sen. Rona E. Kramer (D-Montgomery), who said she would like to see the tax repealed, said many of the concerns lawmakers are hearing now would have come to light had the Senate held a hearing, which is typically part of the legislative procedure. "The culprit here was the process," Kramer said.

The computer services tax was not one of the options on the table when Gov. Martin O'Malley (D) called the special session. O'Malley and some lawmakers raised the idea of expanding the sales tax to various services to help close a gaping budget shortfall and to modernize Maryland's tax code, reflecting an economy now driven more by services than manufacturing.