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State Governments Are Increasingly Taxing Tech Like Traditional Businesses
As Maryland faces a $3 billion budget shortfall, state lawmakers have passed a bill requiring business-service providers—including tech firms—to pay a sales tax on digital services. This move aligns with a broader national trend of states treating tech companies more like traditional businesses regarding taxation.
The Evolution of Sales Tax
Sales tax, originally introduced during the Great Depression, was first applied only to physical goods. Over the decades, as the economy shifted towards services and digital products, policymakers debated how (and whether) to tax these sectors. The rise of the internet and cloud-based software complicated the issue further.
States have slowly adapted:
E-commerce sales taxes became widespread after the 2018 South Dakota v. Wayfair Supreme Court ruling.
Digital goods taxes (e-books, streaming services, software downloads) exist in 41 states.
Taxes on digital services—such as software development or IT consulting—remain the least defined, and Maryland’s latest move falls into this category.
Tech Lobbying and the Resistance to Taxation
Maryland is not the first state to attempt a “tech tax.” In the 2010s, Pennsylvania considered a similar tax, but it was defeated after strong opposition from tech industry groups like the Pittsburgh Tech Council and PACT. Now, the Maryland Tech Council is using the same playbook:
🔹 Argue that tech businesses are mobile and can relocate to lower-tax states.
🔹 Highlight the economic benefits of tech jobs, which tend to pay well and have a multiplier effect.
🔹 Warn policymakers against discouraging innovation, as fewer startups may form if taxes are too high.
But in a post-pandemic world, these arguments may carry less weight. With more remote work and international hiring, many tech firms are less tied to specific locations. If they’re not engaging with local communities as much, states may feel justified in taxing them more aggressively.
Are Tech Taxes Inevitable?
Maryland is considered a high-tax state, much like Massachusetts, California, and New York. However, these states also invest heavily in education, infrastructure, and public services—things that high-skilled tech workers value.
The real question isn’t whether tech firms should be taxed, but rather: Are these taxes fair compared to the services they receive? Many tech companies—particularly software consulting firms—have high profit margins (10%+), minimal physical assets, and rely heavily on talent. They won’t necessarily drive population trends, but Maryland should be more concerned about whether people want to live there.
What’s Next? As states continue to refine tax policies, tech businesses will need to navigate an increasingly complex tax landscape—one where they are no longer exempt from the rules that apply to traditional industries.
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