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MDSPE blocks effort to tax engineering services

 

Posted August 30, 2017

It was the kind of official notice from a government agency that can make a business owner’s heart stop.

Rothfuss Engineering Co. in Jessup had been providing forensic consulting services to public utility, legal, manufacturing and insurance clients for nearly four decades when it was suddenly hit with a huge tax bill. The Office of the Comptroller of Maryland had deemed that forensic engineering services were subject to the state’s sales and use tax. The total bill for taxes, penalties and interest for work performed from 2012 through 2016 topped six figures.

Initially, the assessment looked like an error by a mistaken or overzealous auditor, said Chris Costello, Senior Partner in Public Sector Consulting Group and lobbyist for the Maryland Society of Professional Engineers. 

The General Assembly had debated expanding Maryland’s sales tax to cover many additional services in 2007. 

“Engineering was one of them,” Costello said. “But we were down there in Annapolis with the barricades up. We pointed out how disastrous that would be and we stopped the tax from being applied to engineering.”

Efforts by Rothfuss Engineering and the MDSPE, however, to resolve the tax assessment through discussions with officials at the Comptroller’s Office went nowhere. Officials rejected arguments that the tax law simply didn’t apply to forensic engineering services.

“That lead me to believe my worst suspicions,” Costello said. “I had thought this was a mistake by an over-enthusiastic auditor. But it became clear that they were doing this on purpose.” 

Costello further feared that the Rothfuss Engineering tax assessment could be the first step in an effort to apply Maryland sales tax to all forensic engineering services or even engineering services generally.

So the MDSPE and the American Council of Engineering Companies launched an effort to amend Maryland’s tax law to prevent taxation of engineering services. They drafted legislation, Senate Bill 235, that clarified a provision in Maryland tax law which made private detective services taxable. Since the state appeared to be stretching the definition of private detective services to include forensic engineering, SB 235 stated that only authorized private detective services could be taxed. 

“This was a case where the government stepped on the wrong toe,” Costello said. “This is one of the things that I find quite admirable about the engineers. When they see something that is out of place, they will get all hands on deck and everybody will come in and they will stamp on every little flame until all the fires are out.”

Costello proved very helpful in shepherding the legislation through the General Assembly, said Nicholas Berger, an associate with Frost & Associates in Annapolis and the attorney for Rothfuss Engineering. “He is very knowledgable. He was able to connect us with some helpful individuals in the House and the Senate, such as Guy Guzzone. He got us in front of the right audiences to explain the situation.”

Although SB 235 got temporarily hung up in a House committee, it passed all readings before Sine Die and was made law retroactive to the date of the tax assessment against Rothfuss Engineering.

That legislation, backers say, was critical to the survival of Rothfuss Engineering and to the health of Maryland’s engineering sector. 

“This was an extremely serious situation,” Berger said. “If the law hadn’t been changed, it would have put my client out of business. Rothfuss Engineering is a small shop, so it was make or break for them. … Now Mr. Rothfuss can continue with his business and retire on his own terms when he wants to.”

The legislation will prevent other engineering firms from facing similar assessments and will help keep engineering services in Maryland, Costello said.

“If you have to pay six percent more for engineering services for a Maryland engineer versus an engineer in Virginia, West Virginia, Pennsylvania or Delaware, think about the consequences of that,” Costello said. “That would mean fewer engineers working in Maryland and how would that be good for the state?”

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