21 Jun Maryland’s SaaS Sales Tax Twist
I have been discussing the Tech Tax since the General Assembly considered it during its 2025 Annual Session. As you are aware, starting July 1, 2025, Maryland will expand its sales and use tax to cover various technology and information services, including Software-as-a-Service (SaaS). But here’s the twist: not all SaaS will be taxed the same way.
Depending on how you use it—and whether your provider knows you’re using it for business—your SaaS subscription could be taxed at either 3% or 6%. That may sound like a minor difference, but over time it adds up. More importantly, being taxed correctly helps avoid compliance issues down the road.
Here’s what small business owners need to know—and what you should be doing now to prepare.
First, you need a bit of a back story. In March 2021, at another time when the General Assembly was struggling to close budget deficits, Maryland became one of the first states to tax digital products, such as:
- Streaming music and video
- E-books
- Digital newspapers
- Downloadable software
- Online learning content
- Certain SaaS subscriptions
These items are taxed at the same sales tax rate, 6%, applied to physical goods sold in the state. You may or may not have even noticed.
Enter the Tech Tax that I have been droning on about for three months. The tech tax will cover many digital services, including the following:
- Web hosting
- Cloud storage
- IT support
- Data processing
- Software development and publishing
- Many forms of SaaS used in business settings
- For a more detailed list of taxed services, check out this blog post from a few weeks ago.
But there’s a twist—SaaS can also fall into the “digital product” category. So, how does the state decide which rate applies?
It’s All About Use Case: Business vs. Individual
The key distinction lies in how the software is used:
- SaaS used solely in a business (enterprise) setting—like a CRM, payroll software, or project management tool—is taxed at 3% as a “taxable tech service.”
- SaaS used by individuals—such as for personal budgeting, photo editing, or hobby-related platforms—is taxed at 6% as a “digital product.”
Sometimes, the same software platform may be sold to both individual and business users. Maryland law requires that when both rates might apply, the higher rate (6%) is used unless it’s clearly for business use.
That means it’s up to you, the buyer, to make your business use clear.
What Small Business Owners Should Do
Even if the tax savings on a $40/month SaaS subscription is only about $1.20, it’s still worth doing this the right way—for both cost and compliance reasons. I recommend the following steps:
1. Review your SaaS subscriptions.
Make a list of all the platforms you’re subscribed to—QuickBooks, Salesforce, Shopify, Gusto, Monday.com, etc. Focus on the ones you use solely for business purposes.
2. Contact your SaaS vendors.
Reach out to their billing or tax compliance team. Inform them that you’re using the software as a Maryland-based business for enterprise (business) purposes. Ask them to classify your use accordingly under the 3% tech services tax. Some vendors may be a bit slow and have not updated their information, so you may need to provide some education to them.
3. Keep a record.
If the vendor updates your profile or tax treatment, save the email or invoice showing the change. That could be important if the Comptroller ever questions the classification.
4. Don’t assume the provider knows.
Vendors aren’t required to assume business use unless you tell them. If you signed up online without specifying your use, they may default to the 6% digital product rate.
A Note About Subscriptions and Contracts
The new 3% tax applies to subscription payments made on or after July 1, 2025, even if your agreement started earlier. That means recurring monthly payments after July 1 will be taxed under the new rule.
For longer-term contracts signed before July 1 and paid upfront, you might not owe the new tax at all—timing matters.
Final Thoughts
I get it, this change may not seem like a big deal—after all, 3% vs. 6% isn’t life-changing on its own. On a $ 30-per-month subscription, we are talking about a difference of just $0.90 per month. However, most of us small business owners utilize several SaaS services (I currently use six and may be adding a seventh). However, I think I have clearly stated my opinion about the General Assembly’s penchant for spending and how they seem ready to punish small businesses before actually cutting statewide expenditures. So, if you can prevent a few dollars a month from going to Annapolis, I’m okay with that.
For small business owners, I encourage you to understand how your tools are taxed, communicate effectively with your vendors, and ensure that you’re being taxed correctly.
At best, you save a bit of money. At the very least, you stay compliant and avoid surprises.
And that’s worth the effort.