‘Absurd’ Tech Tax Is Repealed in Maryland

Published June 1, 2008

The Maryland legislature has passed legislation to remove the state’s so-called tech tax, a levy on computer services.

Under the legislation, the tax will be replaced with a new income tax on residents earning more than $1 million annually, which Gov. Martin O’Malley (D) is expected to sign into law. The repeal passed after debate on April 3.

‘An Absurd Tax’

“This was an absurd tax,” said George Liebmann, executive director of the Calvert Institute for Policy Research, a Baltimore, Maryland-based nonpartisan educational institution focusing on Maryland state and local public policy concerns.

“There is some argument for extending the sales tax to services because the U.S. economy is increasingly a service economy,” Liebmann acknowledged. The tech tax, however, singled out a small portion of the service economy, which itself was poorly defined, Liebmann says. The targeted group was disorganized but “quickly got its act together” to fight the tax successfully.

“Any time you try to tax services you’re on a slippery slope,” noted Daniel Ballon, a technology policy fellow with the Pacific Research Institute. “It’s much easier to tax something that is tangible than something that is abstract.”

The abstract taxes on services become difficult to apply uniformly, Ballon notes.

Difficult to Define

The definition process was even more difficult when applied to computer services, Liebmann said. What constitutes a computer is increasingly difficult to define, he said, pointing to the growing number of BlackBerrys, “smart” phones, and other devices that have more and more computer-type capabilities.

What would make more sense than Maryland’s tech tax would be something like the New Hampshire business enterprise tax, Liebmann says. That tax amounts to 0.75 percent on the enterprise value tax base, which is the sum of all compensation paid or accrued, interest paid or accrued, and dividends paid by the business enterprise, after special adjustments and apportionment. Businesses with more than $150,000 of gross business receipts are subject to the tax.

Because of the low rate, the tax is much more palatable to businesses than a 6 percent tax like the computer tax, Liebmann says. A 6 percent tax is enough to drive some businesses to locate in states without such a tax. The technology providers who would have had to pay the tax are much more mobile than manufacturing and retail firms, so they could easily move to avoid paying the tax.

More Tax Proposals

Liebmann says the issue of new taxes will continue to come up in Maryland and other states as governments look for new sources of revenue. The idea of taxing goods sold on the Internet has been debated as more sales go from traditional brick-and-mortar settings into cyberspace, a trend that is pushing an increasing number of states to seek ways to collect taxes from Internet activity.

The state of Florida’s Taxation and Budget Reform Commission recently approved a proposal that could set the stage for state residents to pay a sales tax on things they buy over the Internet or from home-shopping channels.

A proposal to tax Internet downloads failed in the California Assembly’s taxation committee in April. The legislation sought to assess a sales tax on downloads of everything from music to books, games, videos, and ring tones.

New provisions proposed for a New York State sales tax law, if signed by the governor, would require online retailers based outside the state to collect and remit sales tax on customer orders received through affiliate Web sites based within New York.

“States have a legitimate concern,” Liebmann said. “Maryland is a big-tax state, and the tax base is eroding.”

Targeting Vulnerable Sectors

That is why Maryland and other states have been targeting certain sectors of the service economy, such as computer services, dry cleaners, and other groups that are loosely organized at best and don’t have much experience fighting off government intrusion.

The problem, Liebmann points out, is that each of these groups is relatively small, meaning the tax rate has to be very high in order to raise significant funds.

Extending the sales tax to service businesses is a difficult prospect for state governments, Liebmann said, because service businesses include lawyers and accountants who are generally well organized and can therefore fight back effectively.

“I think this [the imposition, then repeal of the tax] is an object lesson in how not to [increase the tax base],” Liebmann said. If taxes are to be increased, the change has to be gradual to fight against companies moving to states without such a tax and to gain acceptance as the measure works its way through the legislature, he said.

Phil Britt ([email protected]) writes from South Holland, Illinois.