Maryland businesses and individuals will now pay a 3% tax on certain technology and data services — one of the many ways state lawmakers and the governor negotiated to raise money to keep the state’s budget in balance.
You may see the tax when you buy software or when you pay the fee to re-up the space to host your website, starting July 1.
Here are key questions about how the tax is going to work.
What is going to be taxed?
An array of tech and data products and services is subject to the tax.
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The covered categories include computer infrastructure providers, data processing, cloud storage, web hosting, streaming support services, web search portals and archives, crypto currency mining, software publishing and more.
If you want to take a deep dive, lawmakers picked the categories from a government system called the North American Industry Classification System, which divides up different industries and gives them codes.
The relevant NAICS codes are sector 518, sector 519, subsector 5415 and subsector 5132, which you can look up here.
The Office of the Comptroller issued a technical bulletin to help businesses understand how the tax works.
How much money is it going to raise?
Lawmakers estimated that the tech tax will raise about $482 million in the first year, money that will help keep the state government chugging as part of the overall $67 billion budget.
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It will take some time before the actual numbers roll in to see if those projections are correct. Businesses typically send their sales tax collections to the state monthly, and the first monthly reports aren’t due until late August.
Who has to pay the tax?
The seller of a covered product or service will have to charge the 3% tax to the customer, much in the same way that the state’s regular 6% sales tax is applied to many purchases. In other words, the end user or purchaser is the one who pays the tax to the seller, who then remits the money to the state comptroller. That end user can be a consumer or a business.
Businesses have to collect the tax when they’re located in Maryland and so is the customer; they’re outside Maryland but they have a presence here and sell to a customer here; or they’re a remote seller that has at least 200 transactions or $100,000 worth of sales to Maryland customers.
Though it’s businesses selling tech services that have to charge the tax, all sorts of other businesses and consumers will end up paying the tax, said Grason Wiggins, vice president of government affairs for the Maryland Chamber of Commerce.
“It’s called the ‘tech tax,’ but these services are utilized by businesses across all industries across the state,” he said.
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Even the smallest of businesses will be affected. “What business doesn’t have a website these days?” Wiggins noted.
Why was this tax created?
The short answer is that Gov. Wes Moore and state lawmakers had to drum up more money to fill a hole in the state budget.
Facing a more than $3 billion gap between money coming in and planned expenses, they relied on a combination of spending cuts and revenue increases to plug the hole.
This “tech tax” was not included in the governor’s original budget proposal, nor was it proposed as a stand-alone bill. Instead, it was inserted into a budget-balancing bill late in the General Assembly session after weeks of private negotiations among top Democrats.
Supporters of the tax said that it represents a step toward modernizing the tax code. The sales tax currently applies only to physical goods that are sold — everything from books to restaurant meals — but not to services, which are an increasing part of the economy. (Past proposals to extend the 6% sales tax to services have been defeated.)
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Opponents of the tax protested that they didn’t get a chance to make their case to lawmakers and warned that it would drive up the cost of doing business, potentially driving some companies out of state.
With the tax finalized in April and due to be collected starting in July, businesses haven’t had a lot of time to figure out whether they should be charging it or will be paying it, said Wiggins from the Chamber of Commerce.
The chamber has worked with the Office of the Comptroller to educate businesses, including hosting webinars. But some may still be surprised. (Read the Office of the Comptroller’s guidance to businesses.)
“If they’re running a small shop, they’re so busy running their business day-to-day, it’s difficult for them to keep up with the changes in the law that happen every session,” he said. “With the quick turnaround time, we think there are businesses out there who still don’t know about it.”
Is anyone exempt?
There are some narrow exemptions.
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Certain cybersecurity firms won’t have to pay the tax when they pay for cloud computing services.
And there’s also an exception for certain companies in the University of Maryland’s Discovery District near College Park, including those advancing quantum computing — a field where Moore wants to spur economic growth.
Is anyone going to challenge this?
Stay tuned. According to the Office of the Comptroller, no one has yet to challenge the tax because no one has had to collect it.
When the General Assembly created a new tax on digital advertising in 2021, companies quickly challenged and those cases are still pending in the low-profile Maryland Tax Court — though the state is collecting the tax while the cases play out.
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