The 3% sales tax on data, information technology and software publishing is at the center of Democratic leaders’ tax reform plan, which, in addition to more than $2 billion in spending cuts, aims to fill a roughly $3.3 billion budget shortfall.
Proponents say it’s a preferable option where no good ones exist, allowing officials to “modernize” an outdated tax system while targeting a growing, lucrative industry.
Opponents say that logic is severely misplaced and will only cause technology firms to pack their bags.
“We’re going to have to leave the state. That’s our only option,” said Jacob Stokes, president of a 50-person IT and software development company based in Columbia that works as a subcontractor on U.S. Department of Defense contracts.
Stokes said the tax — which, at 3%, would be half as much as the state’s 6% sales tax on most other goods — stands to cost his company, Belay Technologies, about $450,000 annually.
The company does about $15 million in revenue and is among about 50 other “service-disabled veteran-owned small businesses” in Maryland that contract with the DoD and that Stokes has organized to oppose the tax, he said.
According to the group, the businesses impacted by the tax will have to take the immediate hit because they are working under contracts where rates have already been set. Raising their rates in the future, meanwhile, risks their chances of winning new contracts.
“While this tax may seem narrow, its impact on the defense contracting industry would be severe,” the group said in a statement.
Moore has repeatedly said one of his top priorities this year is to reverse Maryland’s sluggish economic growth by investing in emerging technologies and reducing the tax and regulatory burdens on business.
Asked late last week about how the latest proposal could upend that goal, Moore said he believed the budget agreement was “deeply responsible” and as a whole worked to improve the business climate in the state.
“There’s hundreds of millions of dollars that are going towards industries such as life sciences and IT and aerospace and defense. And so I think for a lot of these industries, we all understand their importance to larger economic growth,” Moore told reporters. “We understand their importance in making sure that we’re diversifying our economy off of Washington and they are seeing a level of support from this administration that they have not seen in years.”
Moore did not directly say whether concerns from some of those who are targeted by the technology tax are valid — including from a Democratic delegate from St. Mary’s County, Brian Crosby, who said he was among the Defense subcontractors who would be leaving the state, Maryland Matters reported.
Senate President Bill Ferguson, a Baltimore Democrat, defended the tax more directly on Friday, saying the goal is to expand the sales tax to an area of the “modern economy.”
It’s especially timely, he said, as artificial intelligence is developed and replaces workers who would otherwise contribute to the state’s income tax base.
“As technology has changed, we have seen the application of our revenue system change as well,” Ferguson said. “This is the right time to kind of expand that sales tax to apply to the modern economy.”
Stokes, for his part, said the timing couldn’t be worse. Federal contractors are already in the middle of an unpredictable climate as President Donald Trump and Elon Musk slash federal spending, impacting both full-time federal employees and contractors. Stokes said he’s had to find new work for five employees who were working on a contract that was defunded.
“We’ve been dealing with a lot of uncertainty,” Stokes said.
Expected to generate about $497 million in the fiscal year starting July 1, the tax is the largest single source of new state revenue in the budget moving through the Maryland General Assembly before its last day of session next Monday.
It’s also significantly more narrow than an original sales tax expansion that some lawmakers launched three weeks ago. That plan would have added a 2.5% sales tax on a longer list of business-to-business services like accounting and human resources.
It sparked immense backlash, both from Republicans and business leaders who have opposed all tax hikes, as well as progressive economic groups who said the tax would have been passed on to consumers.
Though the progressives celebrated the House-passed budget that featured the narrower sales tax expansion, groups like the Maryland Chamber of Commerce have not backed off their opposition.
According to the Chamber, about 15,300 employers and 99,400 jobs fall under the types of business classifications that would be directly impacted by the technology-focused tax.
“One of the biggest concerns here is the precedent this sets,” the Chamber said in a statement last week. “Once we start taxing services — whether it’s tech, legal, marketing, or accounting — it becomes easier to expand these taxes to other sectors down the line. Today it’s tech services; tomorrow it could be any other service upon which Maryland businesses and consumers depend.”
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