Tax report stirs fears

The Baltimore Sun

Amid growing momentum for a repeal of Maryland's new computer services tax, Comptroller Peter Franchot released a broad interpretation of the levy yesterday, stoking fears that it will force businesses to leave the state.

Under the draft rules, computer services would be subject to the 6 percent sales tax even if the service provider is located outside of Maryland. That will make enforcing the law difficult and could encourage business customers to relocate computer-related operations, said Franchot, an outspoken opponent of the tax.

"Companies will be lined up in droves to leave the state if the tax is not repealed," he said.

Julie Coons, chief executive officer of the Tech Council of Maryland, called the comptroller's interpretation of the tax "the broadest possible regulation they could have enacted and the broadest in the United States. ... It certainly does not allay any fears."

Among the computer services subject to the tax starting July 1:

Data processing and data storage.

Web services, including Web-site hosting.

Database development.

Hardware and software installation, maintenance and repair.

Telecommunications, banking transactions, computer training and Internet access services are excluded.

The tax will not apply to prime contractors on government contracts, but subcontractors will be taxed, officials said. Government subcontractors form a major chunk of Maryland's high-tech economy.

While the technology tax has been described as largely a "business-to-business" levy, Franchot's office made clear yesterday that people who purchase services for home computers are also subject to the tax "regardless of their business or nonbusiness use."

The regulations came out a day after Gov. Martin O'Malley threw his support behind a movement to scrap the $200 million levy and replace it in part with a personal income tax surcharge on high-earners.

O'Malley, a Democrat, has suggested that Franchot's opposition to the tax could lead him not to enforce it vigorously. The governor has also accused the comptroller of dragging his feet on drafting regulations.

Yesterday, House Speaker Michael E. Busch said debate over the technology tax during the legislative session has been hampered to date by the lack of regulations.

"I appreciate ... that we do have greater information now from the comptroller's office than previously," said Busch, who supports a repeal of the tax if alternative revenues can be found.

Franchot said he did not want to rush regulations on a complicated tax.

He said final regulations will be published "well in advance" of July 1 and promised to "vigorously enforce the law."

Tom Loveland, the owner of an information technology firm in Owings Mills and the founder of a lobby group formed to fight the technology tax, said he was particularly troubled by the comptroller's announcement yesterday that pre-existing contracts would be subject to the levy if payments are made after the July 1 start date.

"All by itself, that's a company-killer," Loveland said.

The regulations clear up one area of confusion within Maryland's high-tech industry. Many business owners have been threatening to move out of state in order to avoid the tax. But if their customers are in Maryland, the tax still applies, under the regulations.

Gary M. Hyman, a tax attorney at Baltimore-based Ober/Kaler, predicted Franchot would have difficulty enforcing that provision.

"It is much easier to just deal with service providers on the sales end than the state having to come back and seek out people who received the services," he said.

Franchot said enforcement challenges and an exodus of businesses could mean the tax will generate far less than the $200 million estimated by legislative analysts. The levy was pushed through in the final hours of November's special legislative session, which was convened to address a $1.7 billion structural deficit in the state budget.

Though a repeal of the technology tax is looking more likely now than it did at the start of the current General Assembly session, there is no firm consensus that a personal income surcharge on millionaires, as O'Malley would prefer, is a palatable alternative.

Senate President Thomas V. Mike Miller said this week he still prefers amending the computer services tax.

And while the Greater Baltimore Committee provided written testimony in support of a high-earner surcharge proposed by Baltimore Sen. Verna L. Jones, the Maryland Chamber of Commerce is fighting both proposals.

"The choice between the computer services tax and a personal income tax is no choice," said Karen Syrylo, a tax consultant for the Maryland Chamber of Commerce. "Do you want your left arm cut off or your right arm cut off? We need both arms."

gadi.dechter@baltsun.com

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