Legislative & Regulatory | Tax

Tax on CPA services off the table in new budget plan

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Maryland's CPAs this week are cautiously optimistic of earning a legislative victory now that accounting, tax preparation, bookkeeping, and payroll services have been removed from a budget framework agreed upon Thursday by Gov. Wes Moore and state legislators.

House Bill 1554 and Senate Bill 1045 originally called for a 2.5% sales tax on a broad range of business-to-business professional services, including those provided by CPAs. But after CPAs joined hundreds of other business leaders from across the state on March 12 in expressing strong opposition to the plan, the services that CPAs provide — including accounting, tax preparation, bookkeeping and payroll services — are no longer included in the plan.

"We're grateful our legislators have recognized the economic and financial risks in taxing these services," said Rebekah Olson, CPA, CEO of the Maryland Association of CPAs. "While the proposed tax has been framed as a tax on service providers, in reality, the burden of taxing CPA services would have fallen squarely on small businesses — Maryland’s economic backbone.

“Especially alarming was the idea of taxing tax preparation services,” Olson added. “Imagine telling a small business owner: ‘Not only do you have to pay taxes, but now you have to pay extra just to figure out how much you owe.’ This tax would have penalized businesses simply for following the law.

"The state should explore alternative revenue solutions that do not burden small businesses,” she said, “and we look forward to now working with legislators on new policies that support economic growth throughout Maryland."

The revamped sales tax proposals are part of a budget package that is quickly making its way through the General Assembly. Maryland Gov. Wes Moore and legislative leaders have agreed to a budget framework that combines new taxes and spending cuts to address a $3.3 billion budget shortfall.

Notably, while CPA services have been removed from the proposed new taxes, data and IT-related services — a critical component for businesses of all sizes — would be taxed at 3 percent if the bills are passed.

Meanwhile, CPAs are urged to remain vigilant, informed, and prepared to take additional action if needed. Nearly a month remains in the General Assembly's legislative session and alternative revenue-raising measures may still be considered — some of which could impact businesses and consumers alike.

The budget's tax provisions

Tax provisions in the current form of Maryland's proposed budget include the following:

Income tax

  • Repeal the phase-in of the standard deduction.
  • Increase the standard deduction by 20% ($3,350 / $6,700 for tax year 2025).
  • Phase out itemized deductions for Federal Adjusted Gross Income above $200,000 by applying a 7.5% phase-out factor.
  • Add two new tax brackets for taxable income: 6.25% from $500,001 to $1 million, and 6.5% for $1,000,001 and above.
  • Modify the child tax credit to phase out rather than having a cliff at $15,000.
  • Revenue impact: $344 million

Capital gains surcharge

  • Establish a new 2% surcharge on capital gains income in excess of $350,000 (1.25% to the General Fund and 0.75% to the Transportation Trust Fund).
  • Revenue impact: $367 million ($229 million to the General Fund; $138 million to the Transportation Trust Fund)

Sports wagering

  • Increase the tax rate from 15% to 20%, with the increase going to the General Fund.
  • Revenue impact: $32 million

Sales tax

  • Establish a sales tax on data / IT services, with a tax rate of 3% and revenue distributed to the General Fund.
  • Revenue impact: $497 million

Repeal sales tax exemptions

  • Repeal exemption for sales of photographic and artistic material used in advertising.
  • Repeal exemptions for the sale of precious metal coins or bullion over $1,000 with exemption for sales at Baltimore City Convention Center.
  • Revenue impact: $21 million

Cannabis tax rate

  • Increase the retail tax rate from 9% to 12%.
  • Revenue impact: $39 million

Vending machine sales tax

  • Apply a 6% sales tax to vending machine sales.
  • Revenue impact: $9 million

Film production activity tax credit

  • Reduce cap for fiscal 2026 from $20 million to $12 million.
  • Revenue impact: $8 million

Local income tax

  • Increase the maximum local income tax rate from 3.2% to 3.3%.

Taxing CPA services: Broad economic consequences

Much of the CPA profession's opposition to a sales tax on professional services centers on the ripple effects it would have across multiple industries, affecting job creation, consumer prices, and Maryland’s ability to compete regionally.

Potential job losses: Increased business costs may force small enterprises to reduce their workforce or scale back on investments, leading to job losses and slowed economic growth. Professional service firms themselves may also struggle under the new tax, further impacting employment in these fields.

Higher prices for consumers: Businesses facing higher operational costs will likely pass those costs on to consumers. This means higher costs for products and services across multiple industries, not just accounting or consulting, but retail, hospitality, and health care as well.

Double taxation on businesses: Unlike a retail sales tax, which is typically imposed on final consumer purchases, a tax on business-to-business services results in “tax pyramiding.” This means taxes are applied multiple times throughout the supply chain, inflating costs at every level before a product or service reaches the end consumer. This unintended compounding effect distorts the tax system and creates an uneven playing field for businesses.

Competitive disadvantage for Maryland businesses: Maryland would become one of the few states in the region to tax professional services. Neighboring states like Virginia and Delaware impose no such tax, making them more attractive destinations for businesses. This could incentivize Maryland businesses to relocate, resulting in job losses and a shrinking tax base.

The administrative nightmare

Beyond the financial burden, the proposed tax would have created significant administrative complexities. The nature of professional services often involves cross-jurisdictional transactions, making it difficult to determine where the tax applies.

  • How will firms handle services provided to out-of-state clients?
  • How will businesses track and report taxable services accurately?
  • How will Maryland enforce compliance for companies that may shift to out-of-state service providers?

These questions highlight the confusion and compliance costs businesses would face under the new tax regime.

A similar attempt to tax professional services in Florida resulted in such widespread administrative chaos and economic disruption that the state repealed the tax just six months after implementation.

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Bill Sheridan