Maryland Tech Tax Update (May 30, 2025)

30 May Maryland Tech Tax Update (May 30, 2025)

As of this writing, we are about one month away from the implementation of a new sales tax on certain technology-related services. The Maryland Comptroller’s Office has published emergency regulations to implement the tech tax. This is a fast-moving matter, and to be frank, I might make some mistakes in my assumptions. I will try to correct and keep matters up to date as best I can.

This post will address the two most common questions I have been getting about the tech tax:

• What services are covered?
• Who is responsible for paying the tax?

Question: What services are subject to the tech tax?

The legislation that created the tax utilized broad North American Industry Classification System (NAICS) codes from the Census Bureau. Specifically, the General Assembly stated that “data or information technology service as described under NAICS Sector 518, 519, or 5415,” would be subject to a 3% sales tax. There was considerable confusion since the named sector codes encompass a broad range of services. The Comptroller’s Office has issued regulations that provide more specificity. This is a lengthy list, so please bear with me.

PLEASE CHECK THIS LIST CAREFULLY; THERE MAY BE SERVICES THAT APPEAR TO BE EXEMPT ON ONE LIST BUT ARE CAPTURED ON ANOTHER LIST.

(h) “Services described under NAICS sector 518” means:

• (i) Application hosting (excluding software publishing);
• (ii) Automated data processing;
• (iii) Cloud computing (except software publishing and computer systems design);
• (iv) Cloud storage;
• (v) Co-location in data centers (i.e., rental of server and networking space in data centers);
• (vi) Computer data storage;
• (vii) Computer input preparation;
• (viii) Computer time leasing;
• (ix) Computer time rental;
• (x) Computer time sharing;
• (xi) Computing infrastructure provision;
• (xii) Computing platform infrastructure provision;
• (xiii) Data capture imaging;
• (xiv) Data entry;
• (xv) Data processing computer services;
• (xvi) Data processing (except payroll services, financial transaction processing services);
• (xvii) Disk and diskette conversion;
• (xviii) Disk and diskette recertification;
• (xix) Electronic data processing;
• (xx) Game server hosting;
• (xxi) Infrastructure as a service (IaaS);
• (xxii) Media streaming data storage;
• (xxiii) Media streaming technical support;
• (xxiv) Microfiche recording and imaging;
• (xxv) Microfilm recording and imaging;
• (xxvi) Optical scanning;
• (xxvii) Platform as a service (PaaS);
• (xxviii) Video and audio technical streaming support;
• (xxix) Video tape and film stock technical streaming support;
• (xxx) Virtual currency (cryptocurrency) mining; and
• (xxxi) Web hosting (excluding software publishing).

(i) “Services described under NAICS sector 519” means:

• (i) Archives;
• (ii) Bookmobiles;
• (iii) Centers for documentation (i.e., archives);
• (iv) Circulating libraries;
• (v) Film archives;
• (vi) Internet search portals;
• (vii) Internet search websites;
• (viii) Lending libraries;
• (ix) Libraries (except motion picture stock footage, motion picture commercial distribution);
• (x) Motion picture film libraries;
• (xi) Music archives;
• (xii) News clipping services;
• (xiii) Press clipping services;
• (xiv) Provision of stock photos;
• (xv) Reference libraries;
• (xvi) Telephone-based recorded information services;
• (xvii) Title search services (except real estate); and
• (xviii) Web search portals.

(j) “Services described under NAICS subsector 5415” means:

• (i) Audio visual and IT (information technology) systems integration design;
• (ii) CAD (computer-aided design) systems integration design;
• (iii) CAE (computer-aided engineering) systems integration design;
• (iv) CAM (computer-aided manufacturing) systems integration design;
• (v) Computer disaster recovery;
• (vi) Computer hardware consulting;
• (vii) Computer network systems integration design;
• (viii) Computer software consulting;
• (ix) Computer systems integration analysis and design;
• (x) Computer systems integration design consulting;
• (xi) Computer systems integrator;
• (xii) Computer software installation.
• (xiii) Computer systems facilities (i.e., client’s facilities) management and operation;
• (xiv) Custom computer application software programming;
• (xv) Custom computer program or software development;
• (xvi) Custom computer programming services;
• (xvii) Custom computer software analysis and design;
• (xviii) Custom computer software support;
• (xix) Custom search engine optimization (SEO) (except hosting and infrastructure support services);
• (xx) Custom software programming;
• (xxi) Custom webpage design services;
• (xxii) Data processing facilities (i.e., client’s facilities) management and operation;
• (xxiii) Industrial robot automation applications/software design and development;
• (xxiv) Industrial robot programming;
• (xxv) Information management computer systems integration design;
• (xxvi) Local area network (LAN) computer system integration design;
• (xxvii) Machine vision software design and development;
• (xxviii) Material handling robot applications/software design and development;
• (xxix) Office automation computer systems integration design;
• (xxx) Robotics applications/software design and development;
• (xxxi) Robotics process automation software design and development; and
• (xxxii) Welding robot applications/software design and development.

Source: Emergency Regulations, pages 7-9.

These lists encompass a wide range of technical and computer-related services that many small businesses utilize.

The Emergency Regulations state :

C. Application of NAICS sector codes.

(1) Each service the vendor provides must be evaluated individually to determine whether it is a data or information technology service or software publishing service.

(2) A vendor may not rely on the principal business activity code reported on their annual income tax return to determine whether the services they provide are subject to sales and use tax.

Source: Emergency Regulations, page 9.

It is essential to note that taxable services may be bundled with non-taxable services. For example, a graphic design firm might design a logo and brand identity package for a customer. Then, that same design firm might integrate the logo and brand identity into a website. The logo and brand design services are not taxable services, but the webpage design services are taxable. It is the duty of the vendor to make that determination.

Question: Who is responsible for paying the tax?

Many of us are familiar with sales tax, as we pay it in various forms, such as when making purchases at a store. Many of us assume, correctly, that the store collects the sales tax and pays it to the state.

The same structure then applies to vendors of now-covered services. If you provide covered services as described above, you will have to register for a Sales and Use Tax License (which, thankfully, is free). Then, each month, by the 20th of the month, you must submit a Sales and Use Tax return and remit payment of the monies to the state. Since many service providers are not registered from a sales tax account, the Comptroller’s Office has provided a handy video tutorial, a pdf guide to register, and a guide to link your sales and use tax to your Maryland Tax Connect account.

Please consult with a good CPA in Maryland to help with these steps; it may save you some headaches.

Now, here is the fun part that is sure to anger many people. Buyers of your services are subject to the tax based on where the buyer is located. So:

(1) If a seller located within the State performs a taxable service within the State, the tax applies.

(2) If a seller located within the State performs a taxable service outside the State, the tax does not apply.

(3) If a seller located outside the State performs a taxable service within the State, the tax applies if the seller is an out-of-state vendor under Regulation .33 of this chapter.

Source: Emergency Regulations, page 5.

Section .33 of the chapter describes when an out-of-state vendor is required to collect and remit sales tax. The Comptroller’s Office, in their webinar (also available on YouTube), noted that an out-of-state vendor is required to collect and pay sales tax if the vendor sells $100,000 worth of services or has 200 or more discrete transactions in Maryland.

The Comptroller did address a fundamental question, namely, where a service is performed. The services captured under this regulation are presumed to be performed where the customer’s tax address is located. As defined by Maryland statute (which is a long definition with a series of analytical steps), a customer’s tax address is essentially their primary place of business.

With that in mind, note the disparities involved. If you are a Maryland business and provide a taxable service to another Maryland business, tax is due. If you are a Maryland business and you provide a taxable service to a non-Maryland business, the tax is NOT due.

IMPORTANT NOTE #1: If you are a Maryland business and you buy a taxable service from an out-of-state vendor that is not required to collect the tax, you, the BUYER, must remit the sales tax to Maryland. For example, let’s say your business uses a specialty software that is provided as a Software as a Service (SaaS) model. You pay $100 per month for the service, but the Vendor does not have enough business in Maryland to qualify as a vendor under the regulations. As a buyer in Maryland, you are required to pay $3.00 per month for your purchase. You may have to ask your vendors if they are collecting and remitting sales tax (it may appear on your invoice).

IMPORTANT NOTE #2: The owners of a business, even an LLC or corporation, may be held PERSONALLY LIABLE for the payment of sales taxes. If your company does not pay sales tax promptly, the state may assess the unpaid sales tax against you personally.

That is all so far. I am still working my way through the regulations and the implications for Maryland small business owners. I will continue to post in this space as I learn more.