Computer Tax Will Hurt Maryland

The Washington Post – by Tom Loveland
Monday, January 7, 2008

Maryland is proud of its strength in bioscience, financial services, health care, higher education and government contracting. Technology investment has driven innovation in those areas and kept our state nimble in a competitive global marketplace.

But the future of Maryland’s strongest sectors is in jeopardy. In November, the legislature voted to extend the state’s 6 percent sales tax to cover computer services. Many of us in Maryland’s technology sector were astonished by the move, which will hurt the welfare of industries beyond our sector and will drive some businesses out of state.

This new tax, which takes effect in July, will put many Maryland businesses at a severe disadvantage. Innovative technology fuels business growth and job creation, but it can be expensive and risky. So it’s often the last thing a business invests in, using the final dollars of its technology budget, if any remain. But now those final dollars will be diverted to the tax, significantly curbing investment in innovation and dampening job creation. Small businesses — the least able to sidestep the tax and a key generator of new jobs — will be particularly affected.

Of course, the tax will most deeply affect the computer services industry. Many customers simply will not be willing — or able — to absorb a 6 percent tax and will seek price concessions or use fewer services. To bypass the tax, large customers may stop issuing contracts for certain computer services and instead perform the work in-house. Customers with locations in multiple states will avoid the tax entirely by having their non-Maryland offices hire non-Maryland vendors. These actions will decrease demand for in-state computer services providers and send higher-paying technology jobs to other states, or even other countries.

It’s important to note that this is not a 6 percent tax on profit, but on revenue. Some computer service firms follow business models that allow a profit of only 7 percent of revenue, with any additional earnings getting plowed back into the company. Other companies — including those having a bad year or investing heavily in their future — earn a profit of less than 5 percent of their revenue or even take a loss. Add a 6 percent tax on revenue, and these companies may have no choice but to leave Maryland or shut down.

Consider my company, Mind Over Machines, which provides custom software applications and business intelligence solutions to clients in the mid-Atlantic region. Our headquarters are outside Baltimore, and we have an office in Bethesda and staff in New Jersey. Although our work is split between in-state and out-of-state customers, we have begun expanding our client base in Maryland. If the tax stands, we will abandon this uphill effort, focusing instead on helping out-of-state companies gain competitive advantage. And if the tax is interpreted to apply to them as well, we will seriously consider moving our headquarters outside Maryland.

Our story is not unique. Other companies are reconsidering their investments in Maryland. For example, CPSI is a 22-year-old, 150-person information technology staffing firm in Baltimore. If the comptroller’s office issues a broad interpretation of the tax bill, CPSI’s profit will be reduced by over 90 percent. John Eckenrode, CPSI’s president, said, “We’ll be forced to reduce staff, cut salaries, or both — or move out of Maryland — just to stay in business.”

Many of us in Maryland’s technology sector were caught off guard by the Legislature’s action. The governor’s proposed budget had targeted luxury services — health clubs, tanning salons and property management — all of which remain exempt. In the end, only computer services were added to the tax.

Passage of the new tax was a wake-up call for Maryland’s information technology industry. In response, we formed the Maryland Computer Services Association, through which we will work together — in coordination with the Maryland Chamber of Commerce, the Technology Council of Maryland and others — to repeal this measure and ensure that the heart of the state’s economy remains vibrant.

While we understand that Maryland needs to shore up its budget, this tax will have a particularly devastating impact on our state’s economy, and we will do everything in our power to see it rescinded.

Tom Loveland is chief executive of Mind Over Machines and co-founder of the Maryland Computer Services Association

View original in The Washington Post