Initial returns on IT and data sales tax falling short of estimates, as state grapples with budget

by Bryan P. Sears, Maryland Matters
March 11, 2026

A controversial sales tax on IT services that was approved last year is not filling state coffers as expected.

The 3% sales tax on business-to-business IT and data services was expected to generate $500 million, but initial numbers reviewed by Maryland Matters show collection is off by as much as 90%.

“It certainly raised some eyebrows, and we’re going to have to pay very close attention,” said Senate Budget and Taxation Chair Sen. Guy Guzzone (D-Howard).

The IT tax was approved last year as lawmakers and Gov. Wes Moore (D) scrambled to close a $3.3 billion structural budget gap with fund transfers, some small budget cuts and $1.6 billion in tax and fee increases. An early proposal would have added sales tax on business-to-business services, but Moore balked at a blanket sales tax, agreeing to the tax on IT and data services instead.

Total collections for the first quarter of the year exceeded $12.5 million. That would put the state on pace to collect $50 million for the year — about 10% of the original estimate.

Guzzone and House Appropriations Chair Ben Barnes (D-Prince George’s and Anne Arundel) acknowledged collections on the tax are running behind projections. The reasons are less clear.

“We can make assumptions and simply guess,” Guzzone said. “But the answer is no, we don’t know why exactly.”

Barnes said it’s important to remember “that these are all estimates, right?”

“Estimates are just that, they’re estimates. I do think they’re coming below estimates for a number of reasons, including some businesses are acclimatizing to the fact that they have to pay it. There may be some avoidance, which we’ll have to deal with,” he said.

It is unclear if some businesses adjusted to the tax by shifting some operations outside the state, which critics of the tax predicted would happen.

“It always was a concern, absolutely,” Guzzone said, adding that it is unclear if those shifts are happening.

“No, I don’t think we’re seeing that,” Barnes said. “I think we’re still going to see significant revenue from it, maybe not what we originally expected.”

Both fiscal chairs said they held no immediate concerns that the underperforming tax collection would create an additional budget issue this year.

That picture could become clearer at Wednesday’s meeting of the Board of Revenue Estimates, the last revenue forecast before the legislative session ends.

At its last briefing, in December, bureau Director Robert Rehrmann noted the sales tax change during his December presentation.

“The good news on the sales tax – the expansion to the IT and data services — we’re going to have data earlier, but we’re not going to have meaningful data until the March forecast,” he said during the December board meeting.

Estimates then included a $79 million decrease in sales taxes. It is unclear how much of that is attributable to the lagging levy on IT and data.

Both Guzzone and Barnes said they expect increased revenue projections Wednesday. That increase could be as much as a “couple hundred million dollars,” according to one estimate. Guzzone and Barnes declined to comment.

“I am expecting it to be — let me choose the words right — it’s not going to be bad,” Guzzone said during a meeting with reporters Tuesday. “It will be on the positive side.”

It is unlikely that any revenue increases would be used to offset cuts in this budget or the use of green energy money. It may be squirreled away instead for next year, when the state faces a $3 billion projected shortfall.

“So of course, all of those kinds of things are theoretical, but I think in an effort to prepare for the future, having a little higher fund balance surplus would be better,” Guzzone told reporters.

The Budget and Taxation Committee meets Thursday to finalize the Senate version of the spending plan for fiscal 2027, a budget that started with a $1.5 billion structural deficit.

“We started with what I consider a pretty darn good budget from the administration,” Guzzone told reporters. “They obviously presented us with a balanced budget, which they have to do.”

By law, the governor and legislature must submit and pass a spending plan that balances both. Moore’s proposed fiscal 2027 plan closes the gaps with a combination of fund transfers and swapping cash for bonds. There are no tax or fee increases.

Guzzone said the projected gap sounded worse than it was.

“I knew it was going to be fine because I knew that we had enough resources and ways to move monies around to get to the point where we would be balanced,” he said.

Included in Moore’s proposal was a $150 million cut — framed as a cost containment — to the Developmental Disabilities Administration. The governor’s budget also relies on transferring $725 million from the Strategic Energy Investment Fund (SEIF). About $100 million of that would give utility customers a one-time $40 credit to offset high energy bills. That amount is half of what the state provided a year ago, and another $292 million would be is used to backfill the budget.

The full Senate could vote on a proposed fiscal 2027 spending plan by next week and  send it to the House by Wednesday.

Guzzone told reporters restoring cuts to the Developmental Disabilities Administration and the SEIF remain under discussion.

Moore’s budget fixes current deficit, but analysts pessimistic about future

“Those two are what is kind of on the table at the moment as we run down to the line,” he said.

Changes to funding from the energy fund will depend on an energy package still developing in the Senate Education, Energy and the Environment Committee. Guzzone said the committee is “putting together the pieces” of its package, which will be worked into the Senate version of the budget.

Exact details remain under wraps.

“I suspect that they’re going to be announcing something very soon, and so that will then drive what we’re going to do on Thursday,” Guzzone said.

The potential for restoring any of the cuts for services for the developmentally disabled are also developing.

“I suspect that we’ll be running this close to the end to try to figure out sort of the best solution on this,” Guzzone said.

Ande Kolp, executive director for the Arc of Maryland, said there is “tremendous fear” over the cuts. Even so, some hold out some hope the funding might be restored.

“As the cuts are heavily aimed at reducing services accessed by people with complex needs, there is a concern that the only way some people will be able to get the care they need will be from an institutional setting,” Kolp said. “This would be a huge step backwards and a human rights catastrophe.”

— Maryland Matters reporter Danielle J. Brown contributed to this report.

YOU MAKE OUR WORK POSSIBLE.

SUPPORT

Maryland Matters is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Maryland Matters maintains editorial independence. Contact Editor Steve Crane for questions: editor@marylandmatters.org.