Tech firms greet new sales tax warily, worry about long-term impacts

When Maryland first announced its new 3% sales and use tax on data and information technology services this spring, Jake Stokes felt his business had no choice but to leave the state.

But after the Maryland Comptroller’s Office issued more guidance on the new regulations, including that pre-existing contracts would be exempt from the tax, he decided to stay. For the time being.

“We started to feel good — or at least that we bought time,” said Stokes, president of the Maryland-based government subcontractor Belay Technologies.

Depending on what regulatory decisions the state makes regarding the implementation of the tax, though, Stokes said he is ready to move the company to Texas — where he already has several employees.

Stokes is one of many Maryland business leaders expressing concern over the impact of the state’s new tax on data and information technology services and software publishing. Some said the tax will hurt Maryland’s economy more than any revenue it will generate.

The new tax, which took effect Tuesday, is expected to generate about $480 million in revenue for the state in its first year, with the amount approaching $750 million by fiscal 2030. The tax will apply to a range of businesses, including computer systems design, software publishing, data processing and hosting, and other services from news to libraries, internet publishing to web search portals.

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In a statement Monday, Gov. Wes Moore’s office defended the taxes, saying the governor worked with the Maryland General Assembly this session to turn the projected $3 billion budget deficit into a $315 million budget surplus, while still providing 94% of Maryland residents with a tax cut or no change in their income taxes.

Moore said that after “years of economic stagnation … Maryland’s economy is finally moving again. In just two years, Maryland has added over 100,000 jobs, more jobs than the previous eight years—which has recently been driven by private sector growth.”

That progress is “only possible” because Moore and other state and local leaders passed legislation that “will grow Maryland’s economy and ensure the long-term fiscal stability of the state,” the statement read.

Grason Wiggins, the Maryland Chamber of Commerce’s vice president of government affairs, agreed that the state needs more economic growth. But he said the tech tax will only serve to make the state less economically competitive with its neighboring states.

“This tax is going to make it more difficult for us to attract businesses,” Wiggins said. “It’s going to make doing business more costly here in the state of Maryland.”

The tax won’t just affect business owners, Wiggins added. Because of the broad range of services included under the tax, the cost will be passed down to consumers through increased prices of services and goods, he said.

Wiggins added that he has seen some companies indicating they are planning to leave Maryland, and has spent the last two months pleading with them to stay.

The only way to solve a budget deficit, Wiggins said, is to generate more economic growth.

“This may have plugged a hole,” he said. “But from a long-term perspective, if it drives businesses away, if it reduces job creation and limits spending, then from a long-term perspective, it’s really just moving the issue down the road and not really solving the problem.”

Some politicians, such as Del. Brian M. Crosby (D-St. Mary’s), have also voiced their concerns over the tax. Crosby, vice chair of the House Economic Matters Committee, said it will have a “heavy impact” on defense contracting, one of the state’s emerging sectors.

It’s not an abstract concept to Crosby, the owner of a small business that is a subcontractor on Defense Department IT contracts: At the height of the debate over the tech tax this year, he acknowledged that he moved some of his business projects to Virginia because of the looming tech tax in Maryland.

He added that he is worried about the impact it will have on other small businesses, particularly minority-owned, women-owned, service-disabled veteran-owned small businesses. Larger contractors will have no incentive to work with smaller businesses outside of “set aside” contracts, he said.

Karen Syrylo, a Maryland-based certified public accountant, said she has heard complaints with the new tax for two main reasons: complicated legislative wording and complicated implementation.

The tax’s legislative wording is too confusing as it uses the North American Industry Classification System (NAICS), a standard used by the federal government to classify types of businesses, to define services that fall under the tax, rather than creating its own definitions, she said.

Syrylo added that it has also been complicated for businesses to install the systems necessary to ensure that the vendor and purchaser are subject to tax.

She said tax will affect an “entire universe of purchasers.”

“Every business and every individual who buys any of these dozens and dozens of services are going to be paying more tax to their vendors,” Syrylo said.