Maryland Intends to Tax My Computer Work
Dec 10th, 2007 by Alex
On November 19th, the Maryland General Assembly voted to increase the state sales tax 20% (from 5% to 6%). At the same time they added computer support services, data center support, custom programming, consulting, and disaster recovery services to the list of services that will be taxed at the new rate (up from 0% previously). In short, the type of work that I do on the side.
Great.
No doubt the Governor had dreams of lining the state coffers with BRAC contract dollars. But since the taxes are collected by the vendors, contracts granted to out of state vendors aren’t likely to generate any revenue for the state. I’m not sure what they were thinking; there aren’t many large corporations that aren’t incorporated in Delaware. The additional tax collected could help combat shortfalls in the budget, but I don’t see how it will be collected from the big boys and if I read things properly I think that overall spending has been increased this year as well. It’ll end up being even money for the state but the end result is that small contractors and self-employed moonlighters like me are going to get smacked with the tax. That cost will get passed through to the customers, and they’ll be more likely to outsource to out-of-state businesses who can remain competitive on cost.
The way I see it, small-time folks like myself will have a few possible ways to go.
The classic approach would be to incorporate, get a federal tax ID, open a new business account at a bank, then make preparations to pay Maryland its 6% tax on the work. All of this introduces additional expenses both of my time and money. Tax preparation costs are tax deductible and no doubt many folks would want an accountant to look over what would now be rather official books lest be cited for underpayment. The sales tax is added to all invoices and passed through to the customer, but you can’t recoup time. Rates will have to be increased to cover the difference, which won’t make the customers happy.
The interesting approach would be to have the customers to take me on as a part-time W2 employee. This effectively shifts the increased overhead to the customer but depending on the size of the business may be less cost efficient than paying me as a 1099-MISC contractor. As an added benefit I would get covered under their liability insurance while on the job, but that also factors into their overhead costs. Probably still more cost efficient than hiring someone on full-time.
The under-the-table cash/barter route isn’t legal. I have too much time, money, and effort invested to even think about trying it, so I won’t even suggest it.
I haven’t decided what I’m going to do yet. To give my clients complete options I’d have to figure out the initial and annual cost of incorporation (as an LLC, most likely) and compute what it would cost to break even on money/time. I’m leaning towards the W2 employee route at present because it’s much easier for me, avoids all of those figures and estimates, and has the added perk of FICA and income taxes taken out automatically throughout the year (as opposed to me figuring them out at the end of the year and paying in out of pocket). As much as I like my clients and appreciate them both as people and as a source of secondary income, it’s still work on the side. I choose to work in addition to my primary job at my leisure, so I don’t think I need to spend too much time trying to be overly accommodating.
No matter what I decided, I still don’t see who this tax is going to help.
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And meanwhile our General Assembly also decided to continue to leave corporate tax loopholes open. In addition they haven’t fixed the problem whereby recordation taxes on real property transfers are avoided by LLCs transferring the ownership of the LLC not the properties. So, many slumlords and “investors” don’t pay. So “small-time folks” like you and the rest of us get to shoulder the burden. Awesome.
I have to wonder if instead of being a computer consultant you bill yourself as a business consultant. That way you can do the computer work but it is for the business in general not the computers specifically.
Paul: Wow, it escapes me why I didn’t think of this. Of course, it would involve me getting creative when I record my occupation on the 1040 and the Schedule C. I could, but I’m too honest. Rather, I fear audits and I have too many tax-deductible expenses that clearly don’t relate to business consulting (e.g. hardware, tools, cabling, etc).
A couple of decades ago, Florida tried to tax services like accounting and advertising. The radio stations went on such a crusade that it got killed and people were actually glad when the sales tax on goods went up 1% instead.
It’s just nuts and sorry it’s causing you a bunch of grief.
Alex: Just because you happen to do a lot of business consulting that relates directly to a firm’s computer systems isn’t your fault? But I get you point about wanting to avoid an audit. You could probably insulate yourself from one if you were able to do at least a little general/non-computer consulting during a year.
Paul: True, course now I have to find additional consulting clients just to keep the ones that I have now. So I have to bill more so that I can continue to pay less. Such a vicious cycle.