Maryland Enters the World of Digital Tax – Part 2

Charles Maniace
March 2, 2021

As reported here, a few weeks ago the Maryland Legislature enacted two bills impacting the state’s approach to tax in the digital economy. The first bill was a first-in-the-nation tax on digital advertising that is already being challenged in the courts on Constitutional grounds. The second, HB 932, while far less controversial, should not be overlooked. In short, the new law extends Maryland sales tax to cover digital equivalents of tangible personal property, which it calls “digital code” or “digital products.”

Since this bill (just like the digital advertising tax) was passed pursuant to veto override from last year, impacted sellers must move quickly. Under Maryland law, a bill passed by override becomes effective 30 days later. The legislative vote took place on February 12, meaning the law becomes effective on March 14, 2021, leaving little time to waste.

States have struggled to keep tax policy consistent with technical innovation since the very beginning. For example, over the last two decades, we’ve seen states have a hard time consistently taxing software as technology evolved from diskette (squarely taxable tangible personal property) to download, and most recently, to the cloud. Ultimately, some forward-thinking states attempted to “future proof” their tax law by holding that software sales and licenses are taxable, no matter how the software is transmitted or utilized.

The same challenge exists with movies, music, books, newspapers and magazines, all of which were traditionally sold in tangible form but now can be obtained entirely online. In expending its sales tax to cover digital products, Maryland is following a well-traveled path. Out of the 47 jurisdictions with “state level” sales tax, all but 16 tax digital books and similar products, while all but 21 tax streaming media.

How it Works

The Maryland law operates by expanding the definition of “retail sale” to include digital products:

  1. With rights of permanent use or less than permanent use.
  2. With rights that may or may not be conditioned on continued payment.
  3. A sale of subscription to, access to, streaming of or the purchase of a digital code for receiving or accessing digital products, including access to a library of digital products in a fixed quantity or a fixed period.

While Maryland has yet to issue regulations or other formal guidance on interpreting this new statute, a reading of the bill supports an understanding that things like digital books and newspapers, downloaded music, and streaming video are all now subject to tax. The new tax would also capture online training, electronically provided computer analysis and reports, and database access. All in all, a comprehensive approach.

However, the bill does not appear to change Maryland law in the area of software whatsoever. Maryland remains one of 12 states that continues to not tax downloaded software (while taxing software on tangible media) and is one of 25 or so states that generally does not tax software provided in the cloud. If Maryland is serious about closing its tax gap by expanding sales tax to be technology-neutral, it would not be surprising to see software as the next logical target.

With a lawsuit already threatening the digital advertising tax and an expanded levy on digital products on the way in just a few days, the phrase “beware the Ides of March” never had more meaning for Maryland taxpayers.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15 year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC and more.
Share This Post

North America ShipCompliant
September 29, 2022
5 Essential Questions to Ask When Searching for a Compliance Partner

Managing beverage alcohol compliance and tax in a rapidly evolving regulatory environment takes expertise and a relentless attention to detail. Odds are, you didn’t get into the industry to spend countless hours each week pouring over mandate changes, tax laws and regulatory updates. Partnering with a compliance software company is an easy way to mitigate […]

E-Invoicing Compliance EMEA
September 27, 2022
Billing SAF-T in Portugal: A New Obligation for Non-Residents

Portugal’s state budget entered into force on 27 June 2022 after protracted negotiations. The budget contained an interesting provision: the obligation to present invoice details to the tax authorities was extended to all VAT-registered taxpayers including non-resident taxpayers, who had long been exempt from this obligation. VAT-registered non-residents now have three options for communicating invoice […]

EMEA IPT
September 27, 2022
Understanding Insurance Premium Tax Prepayments in Italy

Continuing our IPT prepayment series, we take a look at Italy’s requirements. In previous articles we have looked at Belgium, Austria, and Hungary. All insurers authorised to write business under the Italian regime have a legal obligation to make an advance annual payment for the following year. What is the prepayment rate in Italy? The […]

EMEA VAT & Fiscal Reporting
September 23, 2022
Virtual Events and the Risk of Double Taxation

When organising a virtual event, it’s important to determine how this supply will be treated for VAT purposes. We have previously discussed VAT rules and place of supply for virtual events, this blog will discuss the potential future changes to the VAT position for EU Member States. Current VAT position for virtual events in Europe […]

Brazil E-Invoicing Compliance EMEA
September 22, 2022
Brazil Introduces National Standard for the Service e-Invoice

Brazil is known for its highly complex continuous transaction controls (CTC) e-invoicing system. As well as keeping up with daily legislative changes in its 26 states and the Federal District, the country has over 5,000 municipalities with different standards for e-invoicing. The tax levied on consumption of services (ISSQN – Imposto Sobre Serviços de Qualquer […]