Maryland’s New Sales Tax on Tech - What SaaS, Cloud, and IT Providers and Customers need to Know

Maryland has implemented a first of its kind 3% tech tax targeting a broad range of IT and digital services. Effective July 1, 2025, this surcharge represents an expansion of the state’s sales and use tax system into the digital economy. Unlike the longstanding 6% sales tax on tangible goods and digital products, the new law covers previously untaxed services, such as software as a service (SaaS), cloud storage, and IT consulting - reshaping the cost structure for tech providers and buyers alike.

Why It Matters

Maryland’s new tax directly affects the state’s technology-driven economy, startups, federal contractors, and any business buying or selling IT services within the state. It reflects a broader trend of states modernizing tax codes to keep pace with the digital landscape. Compliance with the new tax will likely be most challenging for small to medium sized businesses with less resources than large companies.

What Services Are Being Taxed?

The tax applies to a broad range of data, IT and system software services, aligned with various North American Industry Classification System (NAICS) codes, including 518, 519, 5132, and 5415. Services and businesses affected include:

·      Data processing

·      Cloud storage

·      Web hosting

·      Software publishing

·      IT consulting; and

·      Custom software design.

The tax covers includes both prepackaged and subscription-based software, meaning SaaS, IaaS, and PaaS platforms fall within the new tax’s reach. However, just because a business is aligned with an NAICS code does not dictate the business's tax obligations and is not determinative. For a complete list of impacted services, Maryland Technical Bulletin 56 provides detailed information.

For businesses that already pay Maryland’s 6% sales tax on certain services, the new 3% tech tax is not on top of the normal sales tax. Only one or the other applies.

Who is Affected?

Any company that provides or receives these taxable IT services within Maryland will feel the impact. This includes in-state businesses as well as out-of-state providers delivering digital services to Maryland-based clients.

The tax is assessed on the recipient of the service, but most service providers will be required to collect it. If the service provider doesn't charge the sales tax, the recipient must separately pay the tax to the Comptroller as a use tax.

Federal contractors aren't automatically exempt and may need to present a Sales and Use Tax Exemption Certificate. Subcontractors, unless separately exempt, may find their services taxed even if the prime contractor is exempt. Additionally, consumers may see rising prices as companies adjust their pricing to account for the new tax.

Bottom line: If you sell or buy digital services touching Maryland, this tax may apply—regardless of where your company is headquartered.

Are there Any Exemptions?

Yes, but they are narrow. Certain technology services directly tied to specific non-profits and governments are exempt under specific circumstances. Additionally, certain technology services directly tied to academic research initiatives, such as those within the University of Maryland’s Discovery District, are excluded. Cloud computing sold to cybersecurity firms and contractors engaged in certain qualified activities may also be eligible for carve-outs.

Additionally, companies that use IT services both inside and outside Maryland may leverage a Multiple Points of Use (MPU) certificate to apportion the tax and avoid double taxation on out-of-state usage.

Decoding the Digital Details

Beneath Maryland's seemingly simple tech tax lies a web of nuanced complications. For instance, if a business buys cloud storage or IT services to use internally while fulfilling a tax-exempt government contract, the business still owes the 3% tax. Why? Maryland sees the business, not the government, as the end-user of the service. This contradicts the common misconception among contractors that government-related work is automatically exempt.

The resale exemption doesn't apply unless the services are passed along unchanged, which is rarely the case in service-heavy IT work.

Here's another wrinkle: if a subcontractor is prohibited by contract from charging sales tax to a prime contractor—even for agreements entered before Maryland's July 1, 2025 effective date—they're still liable for the tax. The subcontractor must pay and remit the 3% tax out of pocket, even if they can't recover it from the buyer.

SaaS taxation depends on how the software is used. If sold to an individual, it's taxed at 6% as a digital product under current Maryland law. But if sold to a computer enterprise, it falls under the new 3% tax. When there's ambiguity, Maryland applies the higher of the two possible rates. This rate-flipping based on end use adds confusion and audit risk that's especially challenging for software vendors and buyers navigating mixed-use environments.

What Should Businesses Do to Adjust to the New Law?

Businesses should start by auditing their existing IT service contracts and reviewing whether the tax applies to their operations or users. Invoicing systems should be updated to include the 3% rate where applicable. Companies that anticipate exposure must apply for a Sales and Use Tax license by filing a Combined Registration Application and register to electronically file returns through Maryland Tax Connect. Those with multi-jurisdictional footprints should prepare to administer MPU certificates.

For businesses receiving IT services from out-of-state vendors not collecting Maryland tax, the burden shifts to the purchaser to self-assess and remit use tax. Companies should establish internal review protocols to identify non-taxed invoices, particularly for remote SaaS or consulting services.

The Comptroller is expected to release additional technical guidance and regulations later in the year, with a final bulletin anticipated by November 2025. Businesses that may be affected must stay current with the evolving tax landscape.

Wrapping It All Up

Maryland’s new 3% tax on IT services signals of how state governments are adapting to the digital economy. Companies operating in Maryland must act now to ensure compliance, mitigate risks, and explore exemptions.

For a complete review of your situation from a tax attorney, please contact us to discuss your options. You may call (917) 746-2211 or email us at info@goldberg.tax.