Maryland Comptroller revises sales and use tax guidance for digital products

6.3.21 – SALT

On June 3, 2021, the Maryland Comptroller of Treasury issued a revised version of Business Tax Tip #29, which clarifies the Comptroller’s interpretation of its sales and use tax on “digital products,” including software. With particular attention given to recently-effective amendments by S.B. 787, the revised version explains the Comptroller’s interpretation and application of the sales and use tax to:

The expanded exemption for certain software offerings – including a long list of potentially non-taxable customized, configured, or modified software and eleven explanatory examples;
Services provided electronically, including personal, professional, or insurance services;
Advertising agencies’ services and creation of tangible personal property and digital products; and
Continuing education classes, seminars, or conferences – including those performed by non-profit organizations – and courses and lectures by schools.

2020 H.B. 932 – Chapter 38 of the Acts of the General Assembly of 2021

Effective March 14, 2021, the Maryland General Assembly’s passage of H.B. 932 – over the veto of Governor Lawrence Hogan, Jr. – expanded the sales and use tax to digital products and digital codes. “Digital product” means “a product that is obtained electronically by the buyer or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.”

Business Tax Tip #29 – Original

Following the enactment of H.B. 932, the Comptroller issued Business Tax Tip #29, Sales of Digital Products and Digital Code. The Comptroller indicated numerous items that it will subject to sales tax as digital products, including:

E-Books;
Downloaded or streamed motion pictures, music videos, news and entertainment programs, live events, sporting events, tutorials, etc.;
Access to or use of video or online games; and
Prerecorded or live music, performances, audio books or other written materials, and speeches.

However, relying on a brief reference in the fiscal note, the Comptroller interpreted the sales tax on digital products to apply to sales of canned or commercial-off-the-shelf software if obtained electronically by the buyer, as well as sales of software as a service.

2021 S.B. 787 – Chapter 669 of the Acts of the General Assembly of 2021

Pursuant to Article II, Section 17(c) of the Maryland Constitution, S.B. 787 took effect on May 30, 2021 without Governor Hogan’s signature. The legislation amends Maryland’s sales and use tax on digital products “to reflect the intent of the General Assembly” by remedying unintended effects of the H.B. 932 sales tax expansion. Therefore, S.B. 787 applies retroactively to March 14, 2021 – the effective date of H.B. 932. In particular, S.B. 787 made the following amendments:

Excluding from taxation certain prerecorded and live instruction, seminars, discussions, or similar events;
Excluding from taxation professional services obtained electronically or delivered through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities;
Consistently addressing the taxation of digital codes;
Revising the definition of “retail sale” to clarify the taxation of digital codes and digital products; and
Expanding the exemption for sales or use of custom computer software to “configured” or “modified” software, regardless of the method transferred or accessed. Specifically, S.B. 787 amends Md. Code Ann., Tax-Gen. § 11-219(b), which now exempts software or software as a service (SaaS) as follows:
1. The sales and use tax does not apply to a sale of custom computer software, regardless of the method transferred or accessed, or a service relating to custom computer software that:
  1. would otherwise be taxable under this title;
  2. is to be used by a specific person;
  3. (i) is created for that person; or (ii) contains standard or proprietary routines requiring significant creative input to customize, configure, or modify the procedures and programs that are necessary to perform the functions required for the software to operate as intended; and
  4. do not constitute a program, procedure, or documentation that is mass produced and sold to:
    1. the general public; or
    2. persons engaged in a trade, profession, or industry, except as provided in item (3) of this subsection.

Business Tax Tip #29 – Revised

On June 3, 2021, the Comptroller issued a revised version of Business Tax Tip #29. The revised version incorporates S.B. 787’s amendments and also provides numerous explanatory examples. In particular:

Gift Cards and Gift Certificates. Gift cards and gift certificates with a monetary value are not taxable digital codes when redeemable for an item other than a digital product. The Comptroller delineates three examples explaining when gift cards and gift certificates are taxable.
Services Performed Electronically. Per S.B. 787 and COMAR 03.06.01.01(A), Maryland excludes from taxation as digital products certain personal, professional, or insurance services that involve a sale of a digital code or digital product as an inconsequential element for which no separate charge is made. The Comptroller interprets these non-taxable services to be those rendered by, for example, physicians, dentists, lawyers, accountants, and insurance agents. The examples illustrate that the following items are not taxable: (1) non-enumerated PDFs of estate planning documents provided with legal services; (2) reports generated following an employment applicant’s reference check; (3) the placement of employment advertisements online; and (4) a tele-health appointment.
Advertising Agencies. Advertising agency contracts may involve both non-taxable services and the production of tangible personal property or a digital product. The Comptroller enumerates five non-taxable advertising services: (1) the preparation and placement of advertisement in media; (2) public relations; (3) setting up press conferences; (4) conducting market research; and (5) creative concept development. However, advertising agencies are selling digital products when the transaction is for the production and delivery of specific property, including digital photographs, artwork, illustrations, graphics, and videos.
Education. The Comptroller issued numerous examples of when continuing education classes, seminars, or conferences delivered electronically – including those by non-profit organizations – or online courses and lectures by schools are subject to sales tax.
Entertainment. Digital downloads and streaming of prerecorded motion pictures, music videos, news and entertainment programs, live events – including live concerts, sporting events, and tutorials are subject to sales and use tax as digital products.
Data and Documents and Electronic Communications. The Comptroller is applying the sales and use tax on digital products to: (1) the sale of customer lists, mailing lists, medical records, and similar products and (2) a charge to access or a subscription to a chat room, discussion, weblog, or any other venue that permits users to communicate electronically in real time.
Software. Generally, software is subject to Maryland sales and use tax. However, certain software is not taxable so long as it requires “significant creative input to customize, configure, or modify the procedures and programs that are necessary to perform the functions required for the software or SaaS to operate as intended are not subject to the sales and use tax.” Business Tax Tip #29 (June 3, 2021) at n. 41, citing Md. Code Ann., Tax-Gen. § 11-219(b). In addition to numerous examples, the Comptroller issued a long list of potentially non-taxable “custom, configured, or modified” software, including:
1. General Ledger Systems;
2. Budgeting and Forecasting Systems;
3. Vendor Management and Payment Systems;
4. Tax Engine, Provision and Compliance Systems;
5. Human Resource Management Systems;
6. Data Management Systems;
7. Data Hosting, Archival, and Recovery Software and Systems;
8. IT Infrastructure and Application Management Systems;
9. Reservation Systems, including hotel reservation systems, and Event Management Systems;
10. Collaboration, Video Conferencing, Email, and Messaging Systems; and
11. Etc.
Sales of Digital Codes and Products Prior to the Effective Date. Generally, the sales and use tax does not apply to sales or subscriptions that were entered into before March 14, 2021. The examples clarify that: (1) for subscriptions that renew monthly, no sales and use tax will be due until the first charge occurring after March 14, 2021, and (2) no sales and use tax is owed for contracts entered into before March 14, 2021, even when delivery and payment of such digital products does not occur until after March 14, 2021.

The Eversheds Sutherland SALT Team will continue to monitor Maryland’s sales and use tax on digital products and any further revisions to Business Tax Tip #29.