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Computer firms fight new Md. tax byte

January 20, 2008|By ANDREW SCHOTZ

ANNAPOLIS - To some business people and legislators, one new state tax doesn't compute.

A deficit-reduction package that Gov. Martin O'Malley pitched in October proposed making real property management and tanning and fitness businesses subject to a state sales tax.

Instead, during the Maryland General Assembly's recent three-week special session, a Senate committee deleted those industries and, without a hearing, inserted computer service.

The change was approved, meaning computer service soon will carry a 6 percent sales tax.

Several weeks after it was passed, the tax, scheduled to take effect July 1, still bothers lawmakers who opposed it.

Three separate repeal bills were filed in the early days of the legislature's 2008 regular session.

"It was a midnight deal. It just happened - fees in the night," said Sen. David R. Brinkley, R-Carroll/Frederick, who filed one repeal bill. He also has a bill to exempt existing computer contracts from the new tax.

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Although support for most taxes during the special session was divided largely along party lines, the computer service tax is different, said Sen. Jennie M. Forehand, D-Montgomery, who has a separate repeal bill.

"I don't see it as a political issue ..." she said. "I see it as an economic development issue. I don't want these companies leaving the state."

But other Democrats say the tax is more than a philosophical debate now that's it's been passed - there's revenue to consider.

Del. John P. Donoghue, D-Washington, said the computer service tax is expected to bring in $200 million, helping to avoid "very real" cuts that would hurt counties and municipalities.

Alternatives to the tax "could be equally unpopular," said Christine Hansen, a spokeswoman for O'Malley, a Democrat.

"The governor would not be pushing for a repeal of the tax," she said.

"I'm going to work hard to see that it's not repealed," said Senate President Thomas V. Mike Miller Jr., D-Calvert/Prince George's. "It means retaining 200 million dollars that we can use to pay for state services."

Sen. Andrew P. Harris, R-Harford/Baltimore County, who also has a repeal bill, doesn't buy it.

"In a 32-billion-dollar budget, we can make up six-tenths of 1 percent," he said.

Donoghue said he would support a repeal only if a good alternative for making up the revenue was proposed.

Forehand's idea: Raise the alcohol tax.

Business battle

Computer businesses are gearing up for what's next.

For a coalition called "Fight the Tech Tax," it's a lobbying effort for a repeal.

The coalition's Web site says it was organized by the Tech Council of Maryland and the Maryland Chamber of Commerce.

AOL is involved, too.

In Washington County, some businesses are preparing for the effects of the tax.

"I'm not thrilled," said Henry Prentiss, president of Tri-State Data Systems Inc. in Hagerstown, calling details of the new tax "a little vague."

"Computer service," in the law, is defined as:

· Computer facilities management and operation

· Custom computer programming

· Computer system planning and design that integrate computer hardware, software and communication technologies

· Computer disaster recovery

· Data processing, storage and recovery

· Hardware or software installation, maintenance and repair

It does not include Internet access, typing or data entry, or computer training.

Prentiss joked that 75 percent of his business is fixing the computers of "people who can't resist clicking on things when they're on the Internet."

The other 25 percent, he said, is custom-building computer systems.

Scott Hesse, the president of Mid Atlantic System Integrators Inc. of Hagerstown, said computer professionals were singled out and unfairly caught off guard.

Because of market competition, his business probably can't pass along the tax, Hesse said. A price increase likely would drive away customers, so "I think it'll be a direct cut into our profits," he said.

Hesse, a Republican who briefly ran for state delegate in 2006, said he has seen an "anti-business" climate in the state under O'Malley.

He described his business as selling components of technology to companies and making the systems work together.

The Hagerstown-Washington County Economic Development Commission has talked to one out-of-state computer business thinking of moving its headquarters here, said Robin Ferree, the EDC's deputy director.

But when the computer service tax passed, interest waned. Ferree said the company, which he wouldn't identify by name or state, is ready to rule out Maryland if the tax isn't repealed.

Del. Christopher B. Shank, R-Washington, said Washington County can compete for specialized computer businesses because it's cheaper than the metro D.C. region. But, with a new tax, the state will fall behind states without a computer service tax, he said.

The tax's effect on the county's largest computer-related businesses is unclear.

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