By Saleem A. Shareef
The Maryland Comptroller’s Office has provided sales and use tax guidance on data or information technology and software publishing services. The guidance clarifies recently enacted law (see State Tax Update, 05/22/2025) that imposes a 3% tax on these services effective July 1, 2025. (Technical Bulletin No. 56, Maryland Comptroller’s Office, 06/10/2025.)
Taxable services.
Effective July 1, 2025, sales of data or information technology services described under the 2022 edition of the North American Industrial Classification System (NAICS), United States Manual, sectors 518 or 519, or subsector 5415, and system software or application software publishing services described under NAICS subsector 5132 are subject to sales and use tax at a rate of 3%. NAICS subsector 5132 includes software publishing services and NAICS sectors 518 and 519, and subsector 5415 include, respectively: (1) computing infrastructure providers, data processing, web hosting, and related services; (2) web search portals, libraries, archives, and other information services; and (3) computer systems design and related services.
Application of tax: The classification that a business reports as their primary business activity code for federal and state income tax purposes is not determinative of whether tax is imposed on sales of services by the business. Instead, 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. Maryland law employs the business activity descriptions for NAICS sectors 518 and 519, and subsectors 5415 and 5132 to define the data or information technology services and software publishing services subject to the Maryland sales and use tax. A business that has chosen a classification other than 518, 519, 5415, or 5132, but which sells a service described by those codes is required to collect and remit tax on the sale. Similarly, a contract that indicates a certain NAICS code for procurement purposes is not determinative of the taxability of each service provided under the contract. A sale of a service is taxable if it is included in the business activities described in NAICS sector 518 or 519, or subsector 5415 or 5132, regardless of any NAICS code identified in a procurement or solicitation. Each service a vendor provides must be evaluated individually to determine its taxability. The tax applies to all retail sales unless an exemption applies, whether or not the seller makes any profit from the sale. There is no exemption for sales made to affiliated company members.
Software as a service: Digital products and software publishing services include software as a service (SaaS). However, the definition of a digital product excludes computer software and SaaS purchased or licensed solely for the use in an enterprise computer system, including operating programs or application software for the exclusive use of the enterprise software system, that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, the software vendor, or a third party. SaaS that is not purchased or licensed solely for use in an enterprise computer system, such as a purchase for use by an individual, is a digital product and is, therefore, subject to taxation at the 6% rate. To the extent that SaaS is a taxable service, its sale for use for commercial purposes in an enterprise computer system is subject to the 3% rate. Maryland law requires that if a different rate can be applied to a sale or use of a digital product or a taxable service, the higher rate must be applied. To the extent that a sale of SaaS meets the definition of both a digital product and a taxable service when it is sold for use other than in an enterprise computer system, it is taxed at the higher rate. This means that SaaS sold for individual use is taxed at the 6% rate, and the same SaaS is taxed at the 3% rate when sold for use in an enterprise computer system. Software or SaaS that is customized, configured, or modified and does not operate immediately as required by the buyer (i.e., “customized out of the box”) is not exempt from the tax applied to digital products. The exemption from the tax for customized software or SaaS is repealed effective July 1, 2025.
Subscriptions.
Generally, a subscription is an arrangement with a vendor that grants a buyer the right to obtain products or services within one or more categories having the same tax treatment, in a fixed quantity or for a fixed period of time or both. Each subscription payment is considered a separate sale for the purpose of determining when the tax is imposed. A subscription includes a license for use of data or information technology or software publishing services. For example, if a subscription for a cloud storage service is initially purchased prior to July 1, 2025, with a monthly fee, then the payment due on July 15, 2025, is considered a sale occurring on July 15, and is subject to tax. An automatically renewing contract is in the nature of a subscription and is considered a separate sale for determining when the tax is to be collected or paid. For example, if a contract for data or information technology or software publishing services is entered into prior to July 1, 2025, and automatically renews afterwards, then the payment on the renewal after July 1, 2025, is subject to tax.
Installment sales.
Generally, an installment sale is a sale of a product or service where there is an agreed to total price that is paid in smaller, fixed amounts over a period of time. Therefore, no tax is due for installment sales contracts for data or information technology or software publishing services, if the parties agreed on terms and executed the contract before July 1, 2025 (e.g., the contract specifies that some services are provided before and after July 1, 2025, or at least one payment is due after July 1, 2025, and all services are provided after July 1, 2025).
Options: For a contract entered into prior to July 1, 2025, if the contract contains an option for additional services at an additional price, and an option for additional years at a set price, and (1) after July 1, 2025, the buyer exercises the rights to the additional services and additional years; (2) the services are delivered after July 1, 2025; and (3) the payment for the additional services and additional years is made after July 1, 2025, then no tax is due when the buyer exercises the option. The sale of the additional services and additional years, though optional, are part of the original contract entered into prior to July 1, 2025.
Change orders: For a contract entered into prior to July 1, 2025, if the parties subsequently execute a change order to the contract with related payment and services occurring after July 1, 2025, then tax is due when the parties execute the change order. The change order for additional services not described in the original contract is considered a new sale, even though it is effectuated by a change order to a contract entered into before July 1, 2025.
Post-July 1, 2025 contract vendor purchases: For a contract entered into prior to July 1, 2025, a vendor must pay tax on the purchase of data or information technology or software publishing services after July 1, 2025, if the contract price is based on the vendor’s anticipated costs of certain data or information technology or software publishing services the vendor itself must purchase and use in order to perform its contractual obligations for the buyer. In this scenario, the services are purchased by the vendor after July 1, 2025, and the services are used by the vendor to perform the services in the contract with the buyer and are not resold to the buyer.
Credit sales.
Generally, a credit sale is a sale in which the seller permits the buyer to make payment for the sale on or before a certain date after the sale occurs instead of requiring payment in full at the time of sale. The seller sets the time of payment, as well as whether payment must be made in full or in increments on a set schedule, or whether a buyer may have a revolving line of credit. For credit sales contracts entered into prior to July 1, 2025, with some or all services or payments made after July 1, 2025, no tax is due because the sale was completed prior to July 1, 2025.
Contracts with exempt entities.
For contracts with exempt entities, if a contractor purchases and uses data or information technology or software publishing services in order to deliver on the contract, the resale exemption does not apply because the services are not being resold in their original form. If an exempt entity does not permit a contractor to act as its agent, the contractor cannot use the exempt entity’s sales and use tax exemption to make tax-free purchases on behalf of the exempt entity. If a subcontractor sells data or information technology or software publishing services to a contractor that sells the services to an exempt entity, the subcontractor must remit the tax even though it entered into a contract with the contractor prohibiting the subcontractor from charging the contractor tax.
Exemptions.
In addition to existing sales and use tax exemptions, certain exemptions apply only to the sales of data or information technology or software publishing services. The following sales of data services, information technology services, system software publishing services, or application software publishing services are not subject to the Maryland sales and use tax: (1) a sale of cloud computing to a qualified cyber security business (i.e., a “qualified cybersecurity business” is a for-profit entity engaged primarily in the development of innovative, proprietary cybersecurity technology or the provision of cybersecurity services); (2) 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 (i.e., a “qualified company” is a company that contracts with the University of Maryland’s Applied Research Laboratory for Intelligence and Security to develop systems and technologies to advance the use of quantum computers); and (3) a sale by a qualified company located in the University of Maryland’s Discovery District in Prince George’s County. A buyer claiming an exemption must retain all documentation substantiating its qualification for the exemption.
Multiple points of use certificates.
If a buyer knows, at the time of purchase, that a digital code, digital product, taxable data service, taxable information technology service, or taxable software publishing service will be used concurrently by the buyer both inside and outside Maryland, or if it will be resold in its original form to a member of an affiliated group or a related pass-through entity (PTE) of which the buyer is a member, the buyer can present the vendor with a multiple points of use (MPU) certificate at the time of sale. The MPU certificate relieves the seller of the obligation to collect and remit the sales and use tax, shifting that obligation to the buyer. A separate MPU certificate is required for each transaction. Each MPU certificate must report the allocation of use in Maryland for that particular sale. A vendor must refuse to accept an MPU certificate if they know or should know that the digital product, digital code, or data or information technology service or software publishing service will be used entirely in Maryland.
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