Key insights
- Maryland recently enacted new legislation to expand the definition of services subject to sales and use tax to include certain data, information, and software services not previously subject to sales tax by the state.
- Included in the expansion of taxable services are activities commonly classified under the North American Industrial Classification System (NAICS) codes 518, 519, 5415, and 5132.
- Be prepared to comply with the new rules which are effective July 1, 2025, at a reduced sales tax rate of 3%.
Understand compliance rules for state and local taxes.
Maryland data, information, and technology services now subject to 3% sales tax
Effective July 1, 2025, Maryland expanded its sales and use tax (sales tax) to services impacting the technology industry.
The legislation affects businesses providing technology services as well as consumers of these services in day-to-day operations.
Newly taxable services in Maryland
The expanded sales tax includes sales of services described in the following North American Industry Classification System (“NAICS”) codes: 518, 519, 5415, and 5132.
Maryland recently published Technical Bulletin 56 to provide additional new guidance to highlight the changes, including the North American Industry Classification System (NAICS) industry codes accompanied by examples of the impacted services:
- NAICS Sector 518
- Services include but are not limited to application hosting, automatic data processing, and data entry
- NAICS Sector 519
- Services include but are not limited to internet search websites, music archive, and news clipping services
- NAICS Sector 5415
- Services include but are not limited to custom computer software design, support, programming, and consulting
- NAICS Sector 5132
- Services include but are not limited to packaged computer software publishing and gaming site publishing
The NAICS code classification a company reports as its primary business activity for federal and state income tax purposes doesn’t determine whether Maryland sales tax is imposed on the services. Instead, a business must compare the services it provides to the NAICS activity descriptions defined by Maryland law as taxable services.
Limited exemptions from newly taxable services
In addition to existing sales and use tax exemptions, limited exemptions may also apply to the sale of these newly taxable services:
- A sale of cloud computing to a qualified cyber security business
- A sale to a qualified company located in the University of Maryland’s Discovery District in Prince George’s County made in connection with the work of the company
- A sale by a qualified company located in the University of Maryland’s Discovery District in Prince George’s County
Contracts with exempt entities
As stated above, the existing sales and use tax exemptions apply to the sales of these newly taxable technology services. As a result, sales to exempt entities such as the State of Maryland, the federal government, or a nonprofit organization with a qualified Maryland sales tax exemption certificate issued by the Comptroller’s Office, remain exempt from sales tax on these services.
However, it’s important to consider the taxability of purchases contractors make in providing their products and services to exempt customers. In general, Maryland doesn’t allow the pass-through of a state, federal, or nonprofit exemption on purchases made in fulfilling exempt contracts. As a result, a contractor may be liable to pay sales tax on purchases of taxable technology services used or consumed on an exempt job.
Multiple Points of Use Exemption
Just because your business is headquartered in Maryland doesn’t mean taxable software and related services you use in your business are 100% taxable in Maryland.
For example, if a buyer knows at the time of purchase a taxable digital product or software publishing service will be used concurrently by the buyer both inside and outside Maryland (by its employees), the state allows a multiple points of use (MPU) exemption certificate to be issued.
The buyer can issue the seller an MPU exemption certificate at the time of the sale, which would relieve the seller of the obligation to collect and remit Maryland sales tax.
Accepting the MPU certificate shifts the burden to the buyer to remit the allocated use tax to Maryland on its return. To issue an MPU exemption certificate, the buyer must currently have a Maryland sales and use tax account to be able to remit the use tax.
Note there is no obligation for a buyer to issue an MPU exemption certificate. The buyer may choose to pay sales tax to Maryland on the entire sales price.
Timing matters
With the passage of this legislation, the sales tax on specified technology services went into effect on July 1, 2025, which does not permit the Maryland business community much time to consider the impacts on its services sold and consumed within the state.
In certain circumstances, existing contracts may not be subject to the new 3% tax if the contract was executed prior to July 1, 2025. However, this generally does not apply to recurring contracts (e.g., monthly, quarterly, or annual charges such as a license to use Software as a Service).
To help avoid potential risk to your business, carefully examine the facts and circumstances of each contract and consult a sales tax professional before making a determination on the applicability of Maryland sales tax.
Action steps for Maryland technology service providers and consumers of technology services
The Maryland law has many nuances and complexity for technology service providers and consumers of technology services. Consider these actionable steps to start addressing your state sales tax compliance:
Examine your revenue streams
Determine if the services your business is providing to Maryland customers is subject to the 3% sales tax under the new Maryland legislation. Your business may be required to begin collecting sales tax from Maryland customers.
Review your technology purchases
Review your current contracts and agreements with technology service providers to determine if those purchased services are subject to the 3% Maryland sales tax.
Consider multiple points of use
Consider if software and related services are being used both within and outside of Maryland and if the MPU exemption may apply.
Review compliance in other states
Other states impose similar sales taxation on technology, data processing, software, and computer related services. Now may be a good time to review your multistate sales tax compliance on these and other services you sell or buy.
How CLA can help with state and local tax compliance
Our state and local tax professionals work closely with you to assess your tax situation, analyze your compliance systems, and evaluate emerging opportunities. We provide multistate tax consulting services to organizations developing new products and services and adding new customers and markets.
Connect with us to help you build a strong command of your state tax profile so you can make informed business decisions.
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