A 3% sales tax on IT and data services was supposed to help close a $3.3 billion budget hole. One year in, it raised $112.8 million of an expected $500 million, and the state’s largest business lobby is calling for repeal.
By Michael Phillips | MDBayNews
ANNAPOLIS — Maryland’s new tax on business IT and data services closed its first full year having collected less than a quarter of what state budget writers expected, and the shortfall is reviving a fight over whether the levy should exist at all.
The Comptroller’s Office reported that the 3% sales tax on business-to-business IT and data services brought in $112.8 million during fiscal year 2026, which ended June 30. Lawmakers had projected roughly $500 million when they created the tax, putting collections about 77% below the original forecast.
The tax took effect July 1, 2025, under House Bill 352, one piece of a larger package Gov. Wes Moore and the General Assembly assembled last year to close a $3.3 billion structural budget shortfall. It applies to services like cloud computing, cybersecurity, data management and software support sold to Maryland customers, even when the vendor is headquartered elsewhere.
About 2,900 companies have paid the tax so far, according to the Comptroller’s Office, which said it is still processing filings from the most recent quarter. Asked about the gap between the original estimate and actual collections, the office said the initial $500 million figure was built before any real-world collection data existed, and that current projections now rely on actual filings.
“Maryland’s new IT tax raised $112.8 million in its first year — about 77% less than lawmakers originally expected.”
The shortfall did not appear all at once. State budget analysts flagged the problem as early as March, when the Board of Revenue Estimates disclosed the tax had generated only about $35 million through the first half of the fiscal year. The board revised its full-year estimate down to roughly $110 million at that time, a number that held up closely against the final $112.8 million tally.
What the numbers show
“The tax was built to raise roughly $500 million. Its first full year produced less than a quarter of that.”
- FY2026 collections: $112.8 million
- Original legislative forecast: approximately $500 million
- Shortfall: about 77%
- Companies that have paid the tax to date: roughly 2,900
- FY2027 projection from the Board of Revenue Estimates: about $220 million, still less than half the original annual forecast
Senate Budget and Taxation Chair Guy Guzzone, a Howard County Democrat, told reporters in March that state officials could not fully explain the gap. “We can make assumptions and simply guess,” he said at the time, adding that estimates are inherently uncertain.
House Minority Leader Jason Buckel, an Allegany County Republican, was more blunt when the March numbers came out, saying the tax “has succeeded only in depressing the tech economy” without delivering the revenue it was built to raise.
Business groups press for repeal
The Maryland Chamber of Commerce is now calling on lawmakers to scrap the tax entirely, arguing it raises the cost of doing business in the state while producing a fraction of the money it was designed to generate. The Chamber has framed the levy as a barrier to opportunity for working families, saying in a statement that it is “directly damaging upward mobility.”
Brandon Fumagalli, president and CEO of Hagerstown-based Streamline IT Solutions, said he has watched businesses shift their headquarters or billing addresses out of Maryland to avoid the state’s growing tax load on small companies. “A lot of businesses have left the state,” Fumagalli said, according to citybiz.co.
“The Maryland Chamber of Commerce is now calling on lawmakers to scrap the tax entirely.”
State Sen. Justin Ready, the Senate Republican whip who represents Carroll County’s District 5, pointed to the shortfall as evidence the tax is squeezing an industry that can easily relocate. In a social media post responding to the Sun’s report, Ready said the results point to “another reason private sector job growth is flat in our state.”
Academic economists cited in the citybiz.co report were more cautious about drawing conclusions after a single year. Daraius Irani, vice president of business and public engagement at Towson University, said the tax needs to be viewed alongside the broader package of 2025 tax increases, which he said left some companies with the impression that “Maryland was just out to tax its business community.” JP Krahel, an accounting professor at Loyola University Maryland, cautioned that one year of data is not enough to judge the tax’s long-term economic effect, since businesses often take time to fully adjust their operations to a new levy.
Why it matters beyond tech
The tax was designed to reach an area of the economy that touches nearly every business sector, not just Silicon Valley-style tech firms. Companies across manufacturing, health care, finance and retail routinely buy outside IT and data services, meaning the added 3% cost flows well past Maryland’s tech industry itself. Because those services can often be delivered remotely, the state’s business community has argued they are unusually easy to shift out of Maryland’s tax jurisdiction compared with, say, a retail storefront or a factory floor.
“The added 3% cost reaches far beyond Maryland’s tech industry.”
Back in March, when the Board of Revenue Estimates first flagged the shortfall, a surge in estate tax collections was large enough to offset the lost IT tax revenue and leave the state projecting a $355 million surplus for that budget cycle. Board Director Robert Rehrmann cautioned at the time that estate tax revenue is a volatile, likely one-time source of cushion, meaning the IT tax gap could weigh more heavily on future budgets if collections do not improve.
A companion MDBayNews report looks at how this shortfall lands in St. Mary’s County’s District 29, where a departing Democratic delegate’s own IT business became an early flashpoint in the 2025 debate over the tax.
What to Watch
- Whether Republican lawmakers introduce a repeal bill when the General Assembly reconvenes, and whether it gains any traction in a Democratic supermajority.
- Whether the Comptroller’s Office revises its FY2027 estimate of roughly $220 million once final quarterly filings are processed.
- Whether more IT firms report relocating billing operations or headquarters functions out of Maryland, and whether that trend shows up in the state’s broader business tax base.
- How the tax factors into the 2026 races for governor and General Assembly, where affordability and the 2025 tax package are already central campaign issues.
Sources: Reporting is based on the Baltimore Sun’s Sept. 1, 2026 report on fiscal 2026 IT services tax collections, relayed by WBFF/Fox45 Baltimore; a Sept. 1, 2026 citybiz.co report drawing on Comptroller’s Office data; Maryland Matters’ March 11 and March 12, 2026 reporting on preliminary Board of Revenue Estimates figures; a Deloitte Multistate Tax Alert summarizing House Bill 352 (signed May 20, 2025) and Comptroller Technical Bulletin No. 56; and a Sept. 1, 2026 social media post from state Sen. Justin Ready (R-District 5).
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