Message to GBC Members:

Maryland's new computer tax defies realities of 'business physics'

There's a term that some Maryland lawmakers use to explain why they supported legislation passed during the 2007 special session to expand the state's 6 percent sales tax to include computer services.

The tax, which will take effect July 1 if not repealed, is "vendor neutral," they say, implying that it's a tax that vendors simply pass through to customers. The theory, I suppose, is that such a tax costs the vendor nothing.

A piece of legislation, however, cannot suspend the laws of fiscal reality and business physics. For every action there is a reaction.

By definition, a "vendor neutral" tax is "customer negative." In a free-market system, when you add 6 percent to a business cost, whether to the vendor or the customer, there will almost always be some form of reaction -- often unintended.

A significant unintended consequence of Maryland's new computer services tax surfaced last week when information technology firms in our state reported receiving solicitation letters from economic development agencies in Pennsylvania and Delaware. To view the letters, click here.

Recipients included some members of the GBC Technology Committee and at least one GBC board member. While the letters don't specifically refer to the computer services tax, they invite Maryland IT companies to consider "expanding" to their states.

The secretary of Pennsylvania's Department of Community and Economic Development touts his state as "business-friendly" and "low-tax." In another letter, the director of the Delaware Economic Development Office characterizes her state's government as "predictable and responsive" as well as friendly to business.

Both letters invite Maryland IT companies to contact representatives to inquire about potentially locating a facility in their states. And letter recipients are expressing a willingness to talk to other states, according to business owners and managers interviewed last week by the Baltimore Business Journal.

Meanwhile, the computer tax issue is a major topic of conversation with virtually every business executive I talk to these days. Several CEOs of large, computer-intensive companies have told me that they are investigating the implications of the new tax on their businesses and, among other things, would seriously consider relocating their IT divisions outside of Maryland. Some of these divisions employ hundreds of computer services professionals.

This doesn't sound "vendor neutral" to me.

The GBC strongly supports the repeal of the computer services tax before it can do potentially serious damage to Maryland's business growth.

In last week's State House Update, I reported that there are more than a dozen bills before the General Assembly that would either repeal or alter the computer services tax. One of the repeal bills -- HB 196 -- has 72 co-sponsors, which constitutes a majority of the House of Delegates.

For a link to current legislation to repeal the computer services tax, click here.

The House bills are scheduled to be heard on March 12 by the House Ways and Means Committee. I will be there to urge lawmakers to repeal this tax on Maryland's technology business sector that is a critical building block of economic growth and one that we are working hard to attract. We need to nurture investment in this industry rather than discourage its development.

Last week, I noted the general reluctance so far on the part of legislative leaders to support the computer tax's repeal.

However, strong evidence is emerging that this hastily-enacted tax intended to fill a state government revenue gap will inflict harm upon Maryland's business climate that will greatly outweigh the benefit.

It's becoming very clear that the computer services tax is not smart policy. In fact, I would suggest that it's not sound public policy to continue to support its enactment. The tax is not even in effect yet and it's already detracting from our business climate and creating opportunity for our competitors.

That's the bad news. The good news for Maryland lawmakers is that it's not too late to correct this misstep by repealing it.

We'll keep you posted.

Best wishes,