On May 20, 2025, the Governor of Maryland signed House Bill 352(Budget Reconciliation and Financing Act of 2025). The Comptroller of Maryland has published a draft of proposed new regulations and amendments to the sales and use tax concerning its applicability to data and IT services, software publishing services, and other closely related services.
The part of House Bill 352 (H.B. 352) that covers amendments to the sales and use tax expands the taxability scope of services that have been exempt from sales and use tax so far. Before the adoption of the mentioned H.B. 352, the taxability scope for the provision of digital services or digital products within both types of transactions — B2C and B2B — was limited.
These adopted amendments by the Comptroller of Maryland are significantly changing the scope of taxability for digital services in both types of transactions, namely B2C and B2B.
Timeline
Effective from July 1, 2025, the legislation introduces a sales and use tax of 3% to a notably enlarged scope of digital services and products.
New Taxability Rules
As of March 14, 2021, sales of canned or commercial off-the-shelf software, whether delivered in a tangible form or electronically, are subject to a general sales or use tax at a rate of 6%. These types of supplies are classified for tax purposes as digital products and, as such, are subject to tax. The sale of software or software-as-a-service (SaaS) that is delivered or acquired online is also subject to sales and use tax to some extent.
That ”extent” practically means that many different types of software or SaaS, based on the specific attribute, are exempt from Maryland sales and use tax.
However, with the latest amendments that will take effect on July 1, 2025, the scope of taxable technology services will undergo extensive changes. The extended taxability scope, which includes various types of digital services, is based on the North American Industrial Classification System (NAICS).
The extended taxability scope will include data or information technology services described under NAICS sectors 518 and 519, as well as subsector 5415, and software publishing services described under NAICS sector 5132.
Data or information technology services that will become taxable by sales and use tax provisions from July 1, 2025, are the following(non-exhaustive list):
- Application hosting (excluding software publishing)
- Automated data processing;
- Cloud computing (except software publishing and computer systems design)
- Cloud storage
- Data processing computer services
- Infrastructure as a service (IaaS)
- Media streaming data storage
- Web hosting (excluding software publishing)
- Platform as a service (PaaS)
- Web search portals
- Custom computer application software programming;
- Custom computer program or software development
- Custom computer programming services
- Custom search engine optimization (SEO) (except hosting and infrastructure support services)
Software publishing services that are becoming taxable from July 1, 2025, under new provisions(non-exhaustive list):
- Software publishing
- Application development and publishing (except on a custom basis)
- Computer software publishing and reproduction
- Gaming site publishing
Practical Impact
The taxation shift from exempt to taxable under new rules will unquestionably significantly increase the number of registered taxable persons. The registration threshold for out-of-state vendors is designed in a manner that most suppliers of tangible personal property or taxable services operating predominantly on a B2C basis will become obligated to register.
The registration threshold is calculated based on the gross sales made in the previous or current calendar year.
The out-of-state vendors who sell tangible personal property or taxable services using online channels are obligated to register for sales and use tax if one of the following conditions is met:
- The seller’s gross revenue from the sale of tangible personal property or taxable services delivered in the State exceeds $100,000; or
- The person sold tangible personal property or taxable services for delivery into the State in 200 or more separate transactions.
The new sales and use tax will apply to both business-to-consumer (B2C) and business-to-business (B2B) transactions. However, suppliers should be aware that a 3% sales tax shouldn’t be used without due diligence on an extended list of taxable services or tangible personal property.
The rule states the following: transactions are subject to either the reduced 3% or the regular 6% sales tax, but not both. In circumstances where the sale of newly added taxable services can be classified as a sale of taxable tangible personal property or a digital code, digital product, or other taxable service, the higher rate will apply.
How to Stay Compliant
As of July 1, 2025, the scope of out-of-state vendors required to register for Maryland sales and use tax will expand significantly. The significant expansion of the taxability scope for various digital products and services is expected to increase revenue from sales and use tax for the Maryland Comptroller.
Out-of-state vendors of digital products and taxable services should carefully evaluate whether the type of product or service they provide to their customers in Maryland is subject to taxation, and if so, whether they meet the statewide registration requirements.
Many digital service providers and platform operators that have so far been outside the scope of sales or use tax, considering that their supplies have been treated as tax-exempt, will soon be subject to the sales tax mandate. If you have any questions regarding the registration process or your sales tax compliance responsibilities for your business operations in Maryland, please don’t hesitate to contact us. Our tax team would be happy to assist you.
Aleksandar Delic
Stay ahead of Maryland’s evolving tax rules and ensure your business remains compliant.