Maryland budget adds new taxes, increases rates

On May 20, 2025, Maryland Gov. Wes Moore signed House Bill 352, the Budget Reconciliation and Financing Act of 2025, enacting a 3% sales tax on information and software publishing services, eliminating the exemption for custom software, creating two additional individual income tax brackets, and increasing the cannabis tax rate. The legislation aims to address the state’s $3.3 billion budget deficit by raising taxes and fees.

Expanded sales tax base on services

Effective July 1, 2025, House Bill 352 imposes a 3% sales tax on certain information technology services, as described under the North American Industry Classification System, 2022 edition, (NAICS) sectors 518 (computing infrastructure providers, data processing, web hosting, and related services), 519 (web search portals, libraries, archives, and other information services), or 5415 (computer systems design and related services), and system software or application software publishing services, as described under NAICS sector 5132 (software publishers).

The law also provides that the sales and use tax imposed on a taxable service does not apply to a sale of cloud computing to a qualified cybersecurity business. A “qualified cybersecurity business” means a for-profit entity that is engaged primarily in the development of proprietary cybersecurity technology or the provision of cybersecurity services.

Note that the general state sales tax rate remains 6%. The bill provides that if a different rate from the new 3% services rate could be applied to a sale or use of tangible personal property, a digital code or product, or taxable service, the higher rate should apply to the sale.

The bill also allows purchasers of a digital code, digital product, or either of the two new taxable services, to present a ‘multiple points of use’ certificate when the purchaser knows that the digital code, product, or service will be available for use by the buyer in more than one taxing jurisdiction, or resold in its original form to a member of an affiliated group or a related pass-through entity of which the buyer is a member. The purchaser must provide the certificate at the time of purchase. The law provides that the purchaser may use any reasonable, but consistent and uniform, method of apportionment supported by records and reflecting the primary use location.

Certain qualified companies located in the University of Maryland’s Discovery District or that contract with the University’s Applied Research Laboratory for Intelligence and Security are generally exempt from the new tax on information services and system software or application software publishing services.

Finally, the bill eliminates the sales and use tax exemption for the sale of custom computer software.  Previously effective March 14, 2021, Maryland expanded the definition of a retail sale to include the sales or use of a digital product or a digital code; however, the sales and use tax did not apply to the sale of custom computer software.

New brackets, capital gains tax rate increase, and other individual income tax changes

Effective July 1, 2025, and applicable to taxable years beginning after Dec. 31, 2024, the budget legislation creates two new individual income tax brackets on high earners. Individual filers with income between $250,001 and $500,000 will remain subject to the tax at a rate of 5.75%. Individuals with taxable income of $500,001 through $1 million will be subject to a new rate of 6.25%, and taxable income exceeding $1 million will be subject to a rate of 6.5%. Joint filers with income between $300,001 and $600,000 will remain subject to the tax at a rate of 5.75%. Joint filers with income between $600,001 and $1,200,000 and joint filers with income in excess of $1,200,000, will be subject to the new 6.25% and 6.5%, respectively.

Additional individual tax changes include a new 2% tax on capital gains over $350,000, and individual taxpayer itemized deductions are reduced by 7.5% of the excess of federal adjusted gross income over $100,000 for married individuals filing separately, or over $200,000 for all other filers.

Finally, the bill increases the maximum allowable county income tax to 3.30%, from an allowable maximum of 3.20%.

Pass-through entity tax calculation

House Bill 352 clarifies that for purposes of determining a pass-through entity’s income is the portion of the entity’s income under the federal Internal Revenue Code, calculated without regard to any deduction for taxes based on net income are imposed by any state or political subdivision of a state that, for resident members, equal to the member’s distributive or pro rata shares of the pass-through entity, or for nonresident members, derived from or reasonable attributable to the trade of business of the entity in the state.

Cannabis tax rate increase

House Bill 352 increases excise tax rates on the sale or use of marijuana. The rate will remain 9% for fiscal year 2025 and increase to 12% for fiscal years thereafter.

Takeaways

House Bill 352 represents a step toward Maryland closing its budget deficit. Businesses that sell data or information-related services should evaluate how the law changes could impact their sales tax liabilities. As these changes take effect on July 1, 2025, businesses operating in Maryland should seek guidance from state and local tax advisors to ensure compliance and to optimize financial planning.

Several provisions were removed from the bill during the legislative process, including provisions related to corporate income taxes, namely mandatory combined reporting and a proposal to lower the corporate rate from 8.25% to 7.99%, as well as a $0.75 retail delivery fee, like those enacted in Colorado and Minnesota. The state opted for the expansion of the sales tax to information services after an initial proposal to tax many business-to-business transactions, such as accounting, IT support, and other essential business functions, was widely opposed by the business community.

As a result of these changes, many businesses that were not previously required to register for sales taxes may be required to collect and remit sales and use taxes. Businesses that have questions about the expansion of the digital economy in Maryland, or other states, should reach out to their state and local tax advisers.