Maryland narrows definition of taxable digital goods for sales tax

Jul 25, 2022
State & local tax Business tax Indirect tax

On May 29, 2022, Maryland House Bill 791 (cross-filed with Senate Bill 723) became law without Gov. Larry Hogan’s signature, again narrowing the definition of digital products subject to the state’s sales and use tax, effective July 1, 2022. This article addresses Maryland’s recent history addressing the taxation of digital goods as well as provides a summary of the changes made by the new legislation.

Background of digital goods taxation in Maryland

The enactment of House Bill 791 follows significant legislative activity in 2021 related to the sales taxation of digital products within the state. On Feb. 12, 2021, the Maryland General Assembly overrode the governor’s veto to pass House Bill 932, expanding the sales tax base to include various digital goods and products. The law, effective March 14, 2021, originally provided for the taxability of various products, such as the following:

  • Books, e-books, newspapers, and magazines
  • Electronically delivered software
  • Software as a service (SaaS)
  • Charges for viewing or attending continuing education classes, seminars, or conferences, even if sold by a nonprofit or tax-exempt organization
  • Prerecorded or live music, performances, audiobooks, and live speeches including commentaries, dissertations, and lectures

The legislature subsequently clarified through Senate Bill 787 (2021) how the tax applies to online classes after various concerns were raised by tax professionals and educators. Accordingly, the legislature excluded from the tax 1) prerecorded or live instruction by a public or private school or institution of higher education, 2) certain live instruction in a skill or profession, 3) certain live seminars, discussions, or similar events, and 4) professional services obtained electronically. Senate Bill 787 also included a number of technical corrections and clarifications throughout the sales tax statutes to comprehensively address the broad application of the tax on digital products. For more information on the changes in Senate Bill 787, see our previous tax alert Maryland delays digital ad tax; provides digital goods clarification.

Recently enacted changes

House Bill 791 provides further clarification to the state’s digital goods law by narrowing the definition of “taxable digital products” to exclude the following:

  • A product having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities where the purchaser holds a copyright or other intellectual property interest in the product, in whole or in part, if the purchaser uses the product solely for commercial purposes, including advertising or other marketing activities
  • Computer software or software as a service purchased or licensed solely for commercial purposes 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

As noted previously, the revised definitions became effective on July 1, 2022; sales meeting these definitions made prior to this date would be subject to Maryland sales tax. On this same date, the Maryland state comptroller updated Business Tax Tip #29 to reflect the changes enacted by House Bill 791. One notable addition to the updated version of Business Tax Tip #29 is the clarification of the definition of “enterprise computer system,” which is referenced in the recent legislation but not defined in the statute. An enterprise computer system is defined as including:

  • A set of software packages working together as an interconnected network
  • A purchase or license of computer software for simultaneous use on multiple computers that is housed or maintained on an enterprise server, cloud server, or end users’ computers
  • Software designed to run a computer system, an operating program, or application software

The guidance further clarifies that software purchased for commercial use but that is not able to be used by multiple users represents a taxable sale for Maryland sales tax purposes. 

In addition to clarifications specific to the changes in House Bill 791, the updates to Business Tax Tip #29 include guidance on other services which are not subject to Maryland’s sales and use tax. The latest updates list cloud storage services and data transfer fees, search engine optimization services, video conferencing software, website design, and development, web hosting services, and data and information processing services as services not subject to sales tax, regardless of whether the sale is for commercial or individual use. The guidance also clarifies that certain advertising services are not subject to Maryland sales and use tax.

Finally, the comptroller has promulgated revised regulations consistent with recent legislative changes.


Since Maryland initially began taxing digital goods in early 2021, there have been significant updates to both the statutes and procedural guidance on the scope of digital good taxation. The latest legislative changes mean that taxpayers selling SaaS or customized computer software may not need to collect sales tax from sales in Maryland where purchases are made solely for commercial purposes after July 1, 2022, although that determination involves important nuances.

Additionally, taxpayers should be careful to ensure they are maintaining proper documentation to support exemptions and that nontaxable sales are consistent with the detailed definitions outlined in state guidance. Further, certain services listed as exempt from sales tax in the latest updates to Business Tax Tip #29 may be exempt from sales tax but subject to the state’s separately imposed digital advertising gross receipts tax. For more information on the state’s digital advertising tax, see our previous tax alerts: Maryland becomes first state in the nation to tax digital advertising and Maryland delays digital ad tax, and provides digital goods clarification.

Given the complexity involving state taxation of digital goods and the litigation aimed at Maryland’s digital advertising tax, it is likely that the guidance and statutory landscape in this area will continue to develop. Taxpayers selling digital products or services in Maryland should be careful to fully understand and consider the impacts of recently enacted changes and be wary of the potential risks inherent in the complexity surrounding these topics. Taxpayers with questions related to either Maryland sales taxation of digital goods or the state’s digital advertising tax, should consult with their Maryland sales and use tax advisers.

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