Legislative Update #10

Last week the governor and Democratic legislative leaders announced they have a framework of a balanced budget agreement based on cuts and tax reform amid a $3.3 billion deficit. This deal includes a 3% Tech Tax, more about that below, which will cost your business money.

The governor first introduced his $67.3 billion budget plan in January. He said the landscape has changed since. Moore and legislative leaders cited federal government cuts and uncertainty over federal funding as making cuts and tax increases necessary in Maryland.

The General Assembly has until the end of the month to pass a balanced budget (that’s 8 days if they work next weekend). The agreement is not final, but it is estimated to contain $2.5 billion in spending cuts (that have not been identified yet) and $1billion in new taxes. 

Personal Income Tax Changes

The tax framework changes the personal income tax code by creating two new tax brackets for the state’s highest earners. Those who make $500,000 per year will be taxed at 6.25%, while those making $1 million will be taxed at 6.5%. Currently, Marylanders who make over $250,000 are taxed at 5.75%. It also would double the standard deduction while itemized deductions would be eliminated.

Business Tax Increases

The Business-to-Business Service tax has been pulled off the table, but do not get to comfortable, it has been replaced by a Tech Tax that will impact your business. More on that below, but first lest look at the other businesses’ taxes that are in play. The tax package seeks to increase tax rates for gaming and cannabis, the specifics and the rates have not been finalized but lawmakers said the rates will match neighboring states. 

The proposed 75-cent delivery fee and changes to the car trade-in allowance will not be included in the budget. The sugary drinks tax has also been scrapped.

New 3% Tech Tax Will Hit YOUR Business

Legislative leaders want to avoid raising Maryland’s sales tax on goods, so they are targeting the tech industry. The General Assembly claims the tax framework modernizes the state’s tax code by imposing a 3% tax on IT and data services.

So, what businesses will be taxed? While this is still a work in progress it looks like businesses that provide “data or information technology services”.  Not to get too technical, they would be identified by NAICS codes listed below. If you are not sure if you are included in this new tax, check what your tax return to see what NAICS code you have been using.

• 5182: Computing Infrastructure Providers, Data Processing, Web Hosting, and Related Services
• 5192: Web Search Portals, Libraries, Archives, and All Other Information Services
• 5415: Computer Systems Design and Related Services, which includes:
  • • Custom computer programming Services
    • Computer systems design services
    • Computer facilities management services
    • Other computer-related services
• 513210: Software Publishers, which includes designing, documenting, installing, and supporting software.

Bottom line—-almost every business is using IT services from these sectors and therefore will incur a 3% increase in the cost of doing business. In addition, the businesses that are being taxed will have to become tax collectors for the State and will have to spend time and money to set up systems to collect the tax and report the collections to the State.

The effects of this proposed tax extend far beyond harming one of Maryland’s fastest growing sectors. In today’s interconnected economy, tech services are a fundamental component for businesses across all sectors.  

• Small businesses crushed: Every small business that uses software, websites, IT support, or cloud services will face higher costs. With thin margins small business will be hit hardest as essential tech services become more expensive
• Jobs at risk: Employers facing sudden tax increases may freeze hiring or cut positions to manage new expenses
• Defense sector threatened: Critical defense contractors will struggle with increased costs, jeopardizing their competitiveness for federal contracts
• Competitive disadvantage: While Virginia and other neighboring states attract businesses with incentives, Maryland risks pushing companies across its borders

These higher costs won’t stay with businesses — they’ll be passed down to consumers. In a world where technology touches everything, from your work and child’s education to your healthcare, this tax could make essential digital services unaffordable for many Maryland families, widening the digital divide