Md. Legislature Analyzes $1 Billion in Sales Tax Hikes on Services, Internet

Republican Senator David Brinkley Calls Maryland Citizens Who Don't Pay Tax on Internet and Catalog Sales "Criminals"

By Len Lazarick,

(July 27, 2011)—As legislative staff presented over $1 billion in potential new revenues from taxing professional services and Internet sales in Annapolis Tuesday, Senate leaders insisted repeatedly that they weren’t actively considering sales tax hikes.

“This is an effort in the main part to be prepared for any situation,” said Senate Budget and Taxation Committee Chair Ed Kasemeyer, D-Howard. “They’re not priorities. They’re a list of potential revenue sources. It makes sense that the committee understands the pluses and minuses.”

“There’s nothing under consideration here,” reiterated Sen. James Ed DeGrange, D-Anne Arundel.

But Kasemeyer had told an association of nonprofit groups in April that widening Maryland’s sales tax to include more services is “the place to go” in fixing the state’s persistent structural deficit. “We’ve got to tax more things,” he had said.

So business leaders and lobbyists came out with guns blazing as if the possibility of taxing a wide array of services was a clear and present danger that needed to be shot down.

“All of us are concerned about Maryland’s competitiveness,” said Kathy Snyder, president of the Maryland Chamber of Commerce, which has 800 members with 240,000 employees. “Applying the sales tax to professional services will create a loss of jobs” and “is not the way to go.”

“I urge you to take a look at the parade of jobs just crossing the state line,” Snyder said. She referred to an Ernst & Young study that found Maryland’s small business tax climate less favorable than those in Pennsylvania, Virginia and North Carolina.

Few services now taxed

Maryland now taxes only a few services, including telecommunications, security services, commercial building cleaning, credit reporting and pay-per-view TV. The legislature has turned down proposals in the past to tax services for repairs, storage, moving and business consulting.

And after it realized its negative impact, the General Assembly quickly repealed a computer services tax passed in the 2007 special session that also raised the sales tax to 6%.

Several witnesses testified to the impact of sales taxes on services both purchased and provided by many small businesses.

Legislative tax analysts provided a list of 16 services that could be taxed, and the estimated revenues they would bring in. They did warn that “inclusion of a service is not intended to suggest that the service should be taxed.”

The top six money generators included engineering ($211 million), temporary employment ($142 million), payroll processing ($137 million), legal ($122 million), cable TV ($115 million), and car repair ($69 million).

“I think they’re just a list of what has appeared in the past,” Kasemeyer said.

Not every business group was opposed to some tax hikes.

The Maryland Retailers Association urged a tax on out-of-state Internet sales that compete with the stores of its members.

Retailers with a physical presence in the state – such as Target, Sears, Staples and Macy’s – now charge sales tax on the Internet, but a U.S. Supreme Court ruling exempts sales sites with no physical connection to the state.

Consumers not paying use tax

Under Maryland law, consumers who buy out of state products are supposed to pay a 6% “use” tax, but the state makes little effort to collect the tax from individual consumers.

“The fact is they owe the tax or they don’t know,” said Sen. David Brinkley, R-Frederick, who admitted, “I don’t really like taxes. Our taxes are too high.”

He said the state should go after “the real criminals,” the Maryland consumers who don’t pay the tax.

Comptroller Peter Franchot should do public service announcements to “tell them to write a check and send it in,” Brinkley said. “The bricks & mortar retailers have a real beef.”

A University of Tennessee study estimated that Maryland will lose approximately $184 million in uncollected sales and use taxes from remote sales in 2012. The state currently collects $108 million in use taxes from businesses who buy out of state, but less than $1 million in voluntary payments from consumers.

Unlike 23 other states, Maryland does not include a line on its income tax forms requesting payment of use taxes for catalogue and Internet sales.

Neil Bergsman of the Maryland Budget and Tax Policy Institute, an arm of the Maryland Nonprofits association, was “outraged” that the hearing did not include testimony from those might benefit from the tax hikes.

His organization has actively lobbied for an expansion of the sales tax to help pay for social services, rather than continued cuts.

Kimberly Burns, president of Maryland Business for Responsive Government, took an opposite view.

“They should be holding hearings on how to reduce state spending and improving our tax competitiveness,” Burns said.

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