On July 1, 2022, the Maryland Comptroller of the Treasury revised its Business Tax Tip #29, to acknowledge the exclusion of certain business purchases of digital products. In addition, the revised guidance clarifies the taxability of data processing, information, web hosting, and digital advertising services. This is the Comptroller’s third set of revisions to Business Tax Tip #29 since Maryland began taxing digital products on March 14, 2021.
Newly Enacted Modifications to Maryland’s Newly Enacted Taxation of Digital Products
- A product having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities where the purchaser holds a copyright or other intellectual property interest in the product, in whole or in part, if the purchaser uses the product solely for commercial purposes, including advertising or other marketing activities; or
- Computer software or software as a service purchased or licensed solely for commercial purposes in an enterprise computer system, including operating programs or application software for the exclusive use of the enterprise software system, that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, the software vendor, or a third party.
These two categories of nontaxable business purchases include purchases of: (i) certain digital content (such as images, artwork, video, or music) that a business uses in its advertising; and (ii) enterprise resource planning (ERP) software.
While not defined by the new law, the Comptroller explains in Business Tax Tip #29 that an “enterprise computer system” includes the following:
- A set of software packages working together as an interconnected network;
- A purchase or license of computer software for simultaneous use on multiple computers that is housed or maintained on an enterprise server, cloud server, or end users’ computers; or
- Software designed to run a computer system, an operating program, or application software.
Thus, even if prewritten computer software is purchased for commercial purposes, it will be taxable if it cannot be used by multiple users and does not operate with other software or computers. For example, tax preparation software used by a sole proprietorship in its business is not excluded enterprise software because it is not purchased or licensed “for simultaneous use on multiple computers.” The Comptroller warns that a vendor and buyer should retain documentation to support the nontaxable transaction. Importantly, the sale of software or software-as-a-service to an individual for non-commercial use remains subject to Maryland sales and use tax, unless another exclusion or exemption applies.
The General Assembly intended for the amendments to be clarifying in nature, as reflected in the Department of Legislative Services’ Fiscal and Policy Notes to S.B. 723 and H.B. 791: “the amount of revenue decrease [from the amendments] is not expected to be significant.” Further, citing a prior version of Business Tax Tip #29, the Department of Legislative Services also explains in those Notes that, “information published on the Comptroller’s website indicates that many, if not all, of these transactions [described in the amendments] are exempt from the sales and use tax under current law.”
Eversheds Sutherland Observation: In addition to these amendments to Maryland’s digital products taxation, there are other exclusions or exemptions to consider. First, even if computer software does not qualify as nontaxable “enterprise software,” it may still be exempt under Md. Code Ann., Tax-Gen. § 11-219(b) as customized, configured, or modified software. Second, Maryland excludes or exempts certain digital products “inputs” where the seller does not hold an intellectual property interest. Specifically, the tax on digital products does not apply to: (i) sales to “non-end users,” i.e., any person that “receives a digital code or digital product for further commercial broadcast, rebroadcast, transmission, retransmission, licensing, relicensing, distribution, redistribution, or exhibition of the digital product,” and (ii) sales to buyers that will resell a digital product, transfer a digital product as part of digital service, or incorporate a digital product into a physical product or another digital product for resale.
The Comptroller also indicates in the revised Business Tax Tip #29 that a variety of other services are not subject to Maryland sales and use tax, whether sold to a taxpayer for personal or business use:
- Cloud storage services and data transfer fees;
- Search engine optimization services;
- Video conferencing software platforms;
- Web hosting services;
- Website design and development;
- Video conferencing software platforms; and
- Data and information processing services.
To qualify as a data or information processing service, the vendor must be contractually obligated to sort and process data into a unique report for a particular customer at the customer’s request. In contrast, the sale of a customer list, mailing list, or medical report that is static and not customized to a specific buyer is subject to sales and use tax if delivered or obtained electronically.
By statute, the General Assembly imposed sales and use tax on the sale of chat room discussions, weblogs, and similar products as “digital products.” Related to those items, the Comptroller added the following explanatory examples in its latest guidance:
- Subscriptions to weekly newsletters with articles on tax and accounting issues are taxable;
- Monthly subscriptions to a legal research company’s product that allows subscribers to research federal and state statutes, regulations, and court cases are non-taxable services. But separate charges to allow subscribers to download PDFs of treatises, textbooks, journals, and articles that are outside of the research service subscription are subject to tax; and
- A premium subscription for additional content and features from a website that allows users to post a profile of themselves and interact with other uses in real time is subject to tax.
Non-Taxable Digital Advertising Services
In addition to explaining whether a variety of services are subject to sales and use tax, the Comptroller concludes that several digital advertising services are not “digital products” and, therefore, not to subject to Maryland sales and use tax. The following digital advertising services are not subject to sales and use tax, but – per the Comptroller – “may be subject to other Maryland taxes”:
- Banner and display advertising;
- Interstitial advertising;
- Paid search advertising;
- Search engine optimization; and
- Pay-per-click advertising.
Eversheds Sutherland Observation: The list of non-taxable digital advertising services in Business Tax Tip #29 closely reflects the enumerated services subject to Maryland’s separately imposed digital advertising tax, which is being challenged in state and federal courts.
The Eversheds Sutherland SALT Team will continue to monitor Maryland’s sales and use tax on digital products, as well as any further revisions to Business Tax Tip #29.
 Md. Code Ann., Tax-Gen. § 11-101(c-4)(3)(v) – (vi) (2022).
 Dep’t of Legis. Svcs., Fiscal and Policy Note – H.B. 791 Third Reader, Maryland Gen. Assembly 2022 Sess. (March 11, 2022) at 3; Dep’t of Legis. Svcs., Fiscal and Policy Note – S.B. 723 Third Reader, Maryland Gen. Assembly 2022 Sess. (March 19, 2022) at 3.
 See Md. Code Ann., Tax-Gen. § 11-219(b) (“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; (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: (i) the general public; or (ii) persons engaged in a trade, profession, or industry, except as provided in item (3) of this subsection.”).
 See Business Tax Tip #29 at 28, citing Md. Code Ann., Tax-Gen. §§ 11-101(c-5), -(h)(3)(ii), -(n)(3)(ii).