Maryland Daily Record

 

by Nicholas Sohr

 

Published: January 25th, 2012

 

ANNAPOLIS — Gov. Martin O’Malley is considering revisions to his effort to expand Maryland’s sales tax on the Internet after the proposal angered business groups, tech firms and others that deal digital goods and services, an aide said Wednesday.

For opponents, the issue is reminiscent of a battle fought in the governor’s first term over the “tech tax” that would have applied the state’s sales tax to technology services. The measure passed in 2007 but was repealed the following year before it went into effect.

 

“You have a lot of technology companies in the state looking over their shoulders saying ‘Oh, no, not again,’” said Ron Wineholt, a lobbyist for the Maryland Chamber of Commerce. “I don’t think anyone wants to refight the tech tax battle.”

 

O’Malley, a Democrat, included the two-pronged proposal last week in his budget that is now in the hands of lawmakers.

 

The governor called for the General Assembly to raise an estimated $21 million by applying the sales tax to sales made into the state by major online retailers such as Amazon.com. He also proposed taxing “digital goods,” such as downloaded songs, movies and books, a measure the administration said could raise about $5 million.

 

But the “digital goods” definition was left vague and open-ended, prompting fears that it could be interpreted to include software and consulting, accounting, advertising and other services exchanged via the Internet.

 

Cynthia Blake Sanders, an Ober|Kaler attorney who heads the legislative committee of the American Advertising Federation of Baltimore, said the proposal could apply to business-to-business transactions.

 

A video sent from a production company to an advertising firm could have fallen under the definition, she said.

 

“What’s happening is, you’re basically adding 6 percent for the cost of advertising,” she said.

 

A spokeswoman for the governor said the proposal was never intended to target online services, nor was it a second run at the tech tax.

 

She said administration staffers would meet this week to discuss the issue after fielding questions on the issue.

 

The language in the bill “probably needs some clarification,” said Raquel Guillory, the spokeswoman. “This does not apply to services.”

 

Even if the tax proposal is narrowed to include only songs, movies, books and other digital goods, enacting it would put Maryland at a disadvantage to its neighbor south of the Potomac, according to Steve DelBianco, executive director of NetChoice, a group that represents online retailers.

 

The tax would make Maryland less attractive to high-tech companies and the people who work for them, he said. Virginia does not tax digital goods.

 

“Given that Virginia and Maryland compete for new companies and industries, Maryland should be sensitive to these issues,” DelBianco said.

 

Maryland lawmakers have looked to the Internet before to scrape together revenue to alleviate the state’s persistent fiscal problems.

 

Past “Amazon tax” efforts have failed not in small part because the upside to such legislation is unclear, and because of the consistent track records of big online retailers in states that enact such laws.

 

“Three years in a row, the Senate has looked at the issue and said it’s all pain and no gain for Maryland,” DelBianco said. “Those that spend advertising dollars in Maryland will stop spending the advertising dollars and will keep making sales without collecting the tax.”

 

Most state efforts to collect tax from Amazon and other web retailers use their affiliate marketing websites based in-state to establish the basis for taxation.

 

Amazon has canceled affiliate contracts to render such laws ineffective and also resorted to lawsuits and ballot initiatives to overturn them.

 

A study released in November by Comptroller Peter Franchot said the state missed out on $198 million in sales tax from Amazon and other online retailers in 2010.

 

But, Franchot estimated the state could only expect to collect between $20 million and $40 million under a best-case scenario if Maryland enacts affiliate marketing law because web retailers would take steps to avoid it.

 

Maryland “should not pursue legislative remedies based upon the expectation of significant new revenue streams,” the report stated.