Share on Facebook
Share on Twitter
E-mail this article
Print this Article

Taxing Internet sales and downloads in Maryland isn’t likely to meet revenue projections and could drive businesses from the state, according to some experts.

Gov. Martin O’Malley’s proposed budget for fiscal 2013 includes two expansions of the state’s 6 percent sales tax. One proposal would tax purchases of “digital products,” such as music downloads and e-books. The other would require businesses that operate in the state and gross more than $10,000 in sales per year to collect the tax on Internet orders for ordinary retail items.

In addition to raising revenue, the O’Malley (D) administration says the plans will level the playing field for retailers in the state. Local booksellers, for example, have to charge sales tax, while e-books can be downloaded tax-free, said Raquel Guillory, O’Malley’s spokeswoman.

The administration projects the digital goods tax will raise an additional $5 million and the Internet sales tax will raise $21 million, Guillory said.

But the provisions likely are to have an adverse effect on Maryland businesses, said Joseph Bailey, professor of information management at the Robert H. Smith School of Business at the University of Maryland, College Park.

The additional tax may give businesses an incentive to move outside the state, Bailey said, offering as an example. The retailer closed a facility in Dallas last year during a dispute over Texas sales tax, which the company had not been collecting from online sales in the state.

The Maryland Chamber of Commerce also is concerned the taxes would hamper the state’s business climate. Software companies in the state, for example, might be put at a disadvantage compared to their counterparts in Virginia who would not have to charge the tax when customers download their products, said Ron Wineholt, vice president of government affairs for the chamber.

That’s not leveling the playing field. Wineholt said. “We hear that argument, but we disagree,” he said. “It simply opens a new front of taxation.”

The physical location of downloads creates further complications, especially if a Maryland resident downloads something while traveling, Bailey said. “How do we know if a download is happening within a state?”

Guillory said 24 states already taxed digital downloads, but did not have details this week on how compliance would be enforced.

A 2011 report from the office of Maryland Comptroller Peter Franchot raised concerns similar to Bailey’s. The report found that although the state tax on digital goods could generate several million dollars in revenue, the state would not be able to force out-of-state vendors to collect the tax.

The report also cited the example of, which terminated relationships with retailers in several states when they enacted taxes on Internet sales.

Online retailers could make a similar decision regarding affiliated retailers in Maryland, hurting small businesses, Wineholt said.

Franchot is not opposed to the proposed taxes, but doubts they will provide much revenue without a federal law providing oversight, said Caron Brace, a spokeswoman for his office.

Guillory stressed that the new proposals were different from the “tech tax” proposed several years ago. The General Assembly approved extending the sales tax to computer services during a special session in 2007, but repealed it in the 2008 session after outcry from business groups and tech companies.

The new proposals have drawn support from the Maryland Retailers Association, which believes they would restore fairness to brick-and-mortar stores that have been losing business to Internet sales, said Jeff Zellmer, the association’s vice president for government and community affairs.

Taxing Internet sales could help the state hold on to a shrinking sales tax base, said Warren Deschenaux, director of the nonpartisan Office of Policy Analysis, which examines legislation for the General Assembly. But Deschenaux echoed the concerns of the comptroller’s office about whether out-of-state vendors could be made to comply without congressional action.

Wisconsin and New Jersey are two of the states that tax digital goods, but officials could not separate the estimated revenue generated by those goods from the total amount of sales tax collected.