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Delaware delights in Maryland sales tax hike
Higher cost to shoppers projected to spur business in border towns

Eric Ruth
The News Journal; December 11, 2007

SEAFORD -- From over the border, the howls of protest have been loud and long, mixed with dire predictions that the upcoming increase in Maryland's sales tax will be a burden on consumers, a drag on small businesses and a smear on the state's reputation.

All that misery soon may prove to be a joy for Delaware.

Who can blame Delaware merchants if Maryland's tightening tax squeeze is inspiring a bit of schadenfreude -- pleasure taken from someone else's misfortune -- along with some predictions that the state stands to gain status as a good place to start a business.

"I can't see how it's a negative," said Patrick T. Carter, director of Delaware's Division of Revenue.

For years, shoppers from Maryland, New Jersey and Pennsylvania have crossed Delaware borders to save sales taxes on goods. Starting in January, Marylanders who live near the 125-mile border will have even more reason to hit the road. In an effort to address a big deficit, Democratic Gov. Martin O'Malley pushed through a bill that bumps the state's take from 5 percent to 6 percent.

It's not a lot, but shoppers say it's just enough to make them even more inclined to visit Delaware, a state that has officially welcomed -- and even encouraged -- sales tax evaders for decades. After all, while signs touting "Home of Tax-Free Shopping" stand at nearly every big border crossing, none helpfully point out that out-of-staters are still obligated to pay their state's sales tax on Delaware-bought goods once they get home.

That's fine with the many Delaware merchants who benefit from cross-border shoppers, along with the state officials who have not-so-quietly worked to bring more of them here. It's also fine with the many residents who live in the retail-deficient areas of rural Maryland, and the working-class folks who seem less than sympathetic for the tax man's claims of neediness.

"When you do a lot of things, the taxes add up," said Kathy Larmer, a Perryville, Md., mom shopping last week at the Kohl's near Glasgow. As someone who shops in Delaware once or twice a week, Larmer and other Maryland shoppers say they regularly head east for more reasons than taxes.

"People here in Delaware are friendlier than they are in Cecil County," Larmer said. "The stores in Delaware have more supplies."

"More variety," added Larmer's daughter, Manda Parrish.

A 'short drive' to save

Having high sales taxes is one thing in a state hemmed in by an ocean and mountains -- like California -- but is risky in a smaller state like Maryland, said William Ahern, spokesman for The Tax Foundation, a nonprofit, nonpartisan tax research organization based in Washington.

"Almost the whole state really is a short drive to another state," he noted. "Maryland has some stiff competition in the region. If it were sandwiched between New York and New Jersey, maybe there wouldn't be such a stark contrast."

The Delaware businesses that most stand to benefit are obviously those in towns closest to the border -- including Newark, Middletown, Laurel, Seaford, Selbyville and Delmar. But Maryland shoppers said they already drive even farther into the state when a high-ticket item is on their list. This Black Friday, shoppers from as far away as Philadelphia came to Delaware at 1 a.m. to avoid taxes.

"They had to go to Dover before Middletown started growing," said Elana Jackson, co-owner of Elana's Broad Street Florist & Gifts in Middletown, referring to her Eastern Shore customer base. "They come here for McDonald's, they come here for Burger King, they come here for the luxuries Middletown is offering."

Significantly, not only are those Marylanders willing to drive, they are about to get more numerous -- Cecil County expects another 12,000 residents to arrive during the next few years as an expansion of nearby Aberdeen Proving Ground draws thousands of defense-related jobs to the area. They will arrive to an area that already has the highest average local income tax rate in the country, and is about to have the region's highest tax rate on wages, according to The Tax Foundation.

In the short term, the upside to Delaware could be dampened by the soft economy, Carter said. "The one thing that would probably mute the benefit is the cost of gasoline," he said. "It's one thing if it's 2 bucks a gallon."

Business bump

Many small businesses in Delaware also say they don't expect to see an enormous increase in sales, but welcome the added inducement to Maryland shoppers. "It's not that large a percentage, 10 percent maybe," Middletown's Dave Leathrum, owner of Frameworks, said of his Maryland customer base.

The biggest recipient of a business bump might be the sellers of big-ticket items such as wide-screen TVs, Carter said. While many of those big-box retailers aren't locally owned, it does benefit the state's tax base when their revenue grows.

Living near Delaware also benefits business owners like Phil and Lori Turturici, an Elkton couple who base their CertaPro painting business in Newport. "If we buy something, we'll have it shipped to our business, just to save taxes," Phil Turturici said.

As business owners, it does bother them to drive by locally owned businesses in Maryland in search of a Delaware bargain, but in these times, every penny counts, they said. "Today, we have a whole line of shopping to do, and there's not one store in Maryland," he said Thursday.

"We run in to Delaware at least three times a month," said Shanna Whiteman of Elkton. "Ninety percent of it is clothes and toys, things like that."

Such statements are bad news to Maryland business owners, even for some companies formerly exempt from sales taxes. In the more rural counties away from the center of Maryland's population, the economy is now more heavily dependent on companies that must charge sales taxes, according to Brad Bellacicco, director of the Salisbury Area Chamber of Commerce .

"We've already seen a lot of the high-ticket items like furniture being sucked out of our area," he said. "This will aggravate the situation."

According to The Tax Foundation, the tax increase will knock Maryland from 24th to 43rd on its 2008 ranking of business tax-friendly states. Delaware stands at No. 9. A report prepared for the Maryland Chamber of Commerce found that the sales tax increase could end up costing the state 8,000 jobs by 2012.

In Bellacicco's region, there is even talk that computer services firms -- which had been exempt from charging sales tax -- might now leave the state, he said.

"Our clients are going to get nailed pretty bad by it," said Travis Fisher, executive vice president with Inacom Information Systems in Salisbury. "Every hour that we're in there is going to end up adding $5 to $8 per hour to the bill."

That in turn may put pressure on the clients to raise their prices, he said.

In Cecil County, business advocates are working to prepare businesses for the impact, and will be urging them to take advantage of a new element in the law that allows merchants to pay the sales tax for the customers, keeping the price that the consumer sees as low as possible. "What we're hoping for Cecil County businesses is they'll use that as a marketing tool," said Tari Moore, director of the Cecil County Chamber of Commerce.

Businesses in Cecil also can count on the coming population influx to help keep themselves strong, she noted. That's good news not just for Maryland, but Delaware as well, she said.

"That positive impact will also be felt in the region, not just Maryland," she said.

In the end, it even could be possible that everybody wins -- that Maryland shoppers patronize Delaware stores, then gladly send in their 6 percent tax to the Maryland Comptroller's Office.

Or, maybe not.

"I'm sure nobody does do that," Jackson said.