Tech Tax Repeal

In my Random Acts of Taxation commentary published in the Baltimore Examiner on January 21, 2008, I explained why the enactment of the computer services tax was a mistake that will have a detrimental impact on Maryland and why it should be repealed. Several bills have now been introduced in both Houses of the Maryland General Assembly to repeal the tax adopted in the Assembly’s 2007 Special Session.

HB 187, 196, 253 and 326 and SB 41, 46, 138 and 567 would all repeal the tax. (Bill information is available at the General Assembly's website.) All of the House bills are scheduled for a hearing on March 12. None of the Senate bills have been scheduled for a hearing. Despite the fact that HB 196 has 72 sponsors and SB 138 has 17 sponsors, the repeal of the tax faces an uphill battle because of resistance from the President of the Senate.

All of the bills that would repeal the tax are identical except for the sponsors and all carry the same fiscal note reflecting a loss of revenue of $214 million. While the fiscal note reflects direct losses in State revenues from the repeal of the tax, it does not reflect the positive economic impact of attracting and retaining high tech businesses or businesses whose operations rely heavily on technology. The fiscal note does acknowledge that the repeal of the tax would have a “potentially meaningful” impact on small business.

In addition to the bills proposing outright repeal, several bills propose modifications to the application of the tax. Many of the proposed modifications reinforce the view that the computer services tax is ill-conceived, both in theory and in application.

For example, HB 1169 would exempt computer services that are used to provide Internet based publishing services if the publishing services are delivered exclusively or primarily outside the State. Several questions arise: what constitutes Internet publishing services and who is to determine whether they are delivered primarily outside the State? Are newspaper publications that have web sites considered Internet publishing services? Would the Comptroller’s Office need to count the readers within and outside the State to determine whether the publishing services are primarily delivered within the State?

HB 1183 would exempt services that enable users to access content or information over the Internet, such as access to the human genome database. If HB 1183 does not pass, would taxes be imposed on each visit to any web site that provides content or information? If so, what collection mechanism would be employed for all the free web sites now available?

HB 1169 and 1183 are just two examples of the problems created from the hasty adoption of the computer services tax. The administrative burden for the State to collect and the taxpayers to pay will almost surely exceed the revenues to be generated.

HB 281 would exempt computer services used in fulfilling federal contracts and SB 257 would exempt services for fulfilling both State and federal contracts. Since neither the federal government nor the State are generally subject to State taxes, this raises a question about whether the fiscal note estimate of revenue loss includes loss of taxes on services provided to the federal and State governments.

The computer services tax was a bad idea, hastily adopted. It should just as hastily be repealed.

While Maryland legislators fiddle, state officials from Delaware, Pennsylvania and North Carolina are luring Maryland based information technology businesses. It is time to stop fiddling and repeal the tax.