Maryland Budget Imposes Sales Tax on Data and IT Services

The 2025 Maryland budget bill, H.B. 532 (the Bill), was signed into law by the Governor on May 20, 2025. Among the tax increases in the Bill that were enacted to plug the state’s budget deficit is a new 3% sales tax rate on certain data and information technology services, effective July 1, 2025. The Bill also eliminates the exemption for sales of custom computer software and for sales of software and Software as a Service (SaaS) to businesses. The Maryland Comptroller‘s Office issued Technical Bulletin No. 56 (TB 56) on June 30, 2025, to provide guidance to taxpayers on how the new sales tax provisions would apply.

The Bill amends the state’s definition of “taxable services” to include data-related services, information technology services, system software publishing services, and application software publishing services. To determine whether a particular service will come under the expanded definition of a taxable service, the state will look to several business classifications set out in the 2022 edition of North American Industrial Classification System (NAICS). Specifically, services that are determined to come under the following NAICS codes will be taxable:

According to TB 56, neither the NAICS code that a business used as their primary business activity code for federal and state income tax purposes nor any code that may have been used on contracts with third parties is “determinative of whether sales and use tax is imposed on sales of services by the business.” TB 56 states that “a business must compare the services it provides to the NAICS activity descriptions for data or information technology services and software publishing defined by Maryland law as taxable services to determine taxability.”

The guidance does not state how it will be resolved if the state and the taxpayer read the NAICS description differently as to which one applies to the taxpayer’s sales. The NAICS system was created by the US Office of Management and Budget (OMB) as part of a business census and was intended to be self-reporting. The OMB does not audit companies to determine if they are using the correct classification. Thus, there is limited guidance from the body that drafted the NAICS codes regarding how the classification are to be interpreted and applied. This determination may be difficult when dealing with large businesses that engage in a number of different activities and sell a mix of products that could be included under more than one NAICS code.

It is likely that certain services will straddle the line between digital codes or products that were already taxable at 6% and one of the new taxable services taxable at the 3 % rate. The Bill provides that if either the 6% or 3% rate could apply to a particular sale or use of tangible personal property, a digital code or product, or taxable service, the higher rate will be applied.

For example, SaaS could qualify as both a digital product (taxed at 6%) and a software publishing service (taxed at 3%) and thus the higher rate would apply. However, this is complicated by the fact that the definition of a digital product excludes software and SaaS purchased or licensed for use by a business, and such sales are exempt from the 6% tax. Software and SaaS purchased or licensed by an individual, on the other hand, are treated as a digital product subject to the 6% rate.

To the extent that SaaS is now also included under the new definition of a taxable service, its sale to either a business or an individual would be subject to sales and use tax at the new 3% rate. But because the sale of software or SaaS to an individual also meets the definition of a digital product, it is taxed at the higher rate. SaaS sold to a business, which was previously exempt, will now be taxed at the 3% rate.

Maryland previously exempted the sale of software or SaaS that was customized, configured, or modified to the specifications of the buyer from the sales and use tax applied to digital products. However, that exemption from the sales and use tax for customized software or SaaS is repealed effective July 1, 2025. Such sales will be taxed at the 6% rate applied to digital products.

A buyer that that has operations inside and outside of Maryland that purchases a digital code, digital product, taxable data service, taxable information technology service, or taxable software publishing service from a Maryland seller may be able to avoid paying Maryland sales tax on 100% of the sales price. If the taxable item will be used concurrently by the buyer both inside and outside of Maryland, or will be resold in its original form to a member of an affiliated group or a related pass-through entity, the buyer can present the Maryland seller with a multiple points of use (“MPU”) Certificate at the time of purchase.

This Certificate relieves the seller of the obligation to collect and remit the sales and use tax. Instead, the purchaser will pay the tax to Maryland on an apportioned basis. The purchaser may use any reasonable, but consistent and uniform, method of apportionment supported by its records and reflecting the primary use location. TB 56 provides some guidance on apportionment methods that are considered reasonable. A purchaser must have a Maryland sales and use tax account to be able to issue an MPU Certificate. The authority to issue a certificate must be applied for from the Comptroller’s Office for each applicable transaction. TB 56 provides guidance for sellers on how to verify MPU Certificates that are received from purchasers prior to agreeing to not collect the tax.

The law does provide a couple of new targeted sales and use tax exemptions. The sale of cloud computing to a qualified cybersecurity business is exempt as of July 1, 2025. A “qualified cybersecurity business” is defined as a for-profit entity that is engaged primarily in the development of proprietary cybersecurity technology or the provision of cybersecurity services.

In addition, certain qualified companies that are located in the University of Maryland’s Discovery District or that contract with the University’s Applied Research Laboratory for Intelligence and Security are exempt from the new tax on information services and system software or application software publishing services.

Author: Mike Mcloughlin | [email protected]