Maryland Comptroller Revises Tax Guidelines on Sales and Use of Digital Products

On June 3, 2021, the Maryland Comptroller of Treasury released a revised version of Tax tip # 29, which clarifies the controller’s interpretation of its sales and use tax on “digital products”, including software. Paying particular attention to the changes recently entered into force by SB 787, the revised version explains the Controller’s interpretation and application of sales and use tax for:

  1. Expanded exemption for certain software offerings – including a long list of potentially non-taxable custom, configured or modified software and eleven explanatory examples;
  2. Services provided by electronic means, including personal, professional or insurance services;
  3. Advertising agency services and creation of tangible personal property and digital products; and
  4. Continuing education courses, seminars or conferences – including those given by non-profit organizations – and courses and conferences given by schools.

2020 HB 932 – Chapter 38 of the Acts of the General Assembly of 2021

Effective March 14, 2021, the adoption by the General Assembly of Maryland of HB 932 – on the veto of Governor Lawrence Hogan, Jr. – extended the sales and use tax to digital products and digital codes. “Digital Product” means “a product obtained electronically by the purchaser or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical capabilities. , electromagnetic or the like ”.

Tax advice n ° 29 – Original

Following the enactment of Law HB 932, the Controller issued Tax Tip # 29, Digital Product Sales and Digital Code. The Monitor has indicated many things that it will be subject to sales tax as digital products, including:

  1. Electronic books;
  2. Movies, music videos, news and entertainment programs, live events, sporting events, tutorials, etc. downloaded or streamed;
  3. Access or use of video or online games; and
  4. Pre-recorded or live music, performances, audiobooks or other written material and speeches.

However, relying on a brief reference in the Tax Note, the Monitor interpreted 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 SB 787 – Chapter 669 of the Acts of the 2021 General Assembly

Pursuant to Article II, Section 17 (c) of the Constitution of Maryland, SB 787 came into force on May 30, 2021 without the signature of Governor Hogan. The legislation amends the Maryland Sales and Use Tax on digital products “to reflect the intent of the General Assembly” by addressing the unintended effects of the expansion of the HB 932 sales tax. SB 787 applies retroactively to March 14, 2021 – the effective date of HB 932. In particular, SB 787 has made the following changes:

  1. Exclude from tax certain pre-recorded and live courses, seminars, discussions or similar events;
  2. Excluding the taxation of professional services obtained electronically or provided by means of technology having electrical, digital, magnetic, wireless, optical, electromagnetic or similar capabilities;
  3. Systematically address the taxation of digital codes;
  4. Revise the definition of “retail” to clarify the taxation of digital codes and digital products; and
  5. Extend the exemption for the sale or use of custom computer software to “configured” or “modified” software, regardless of the method transferred or accessed. Specifically, SB 787 amends Md. Code Ann., Tax-Gen. § 11-219 (b), which now exempts Software or Software as a Service (SaaS) as follows:
    1. Sales and use tax does not apply to a sale of custom computer software, regardless of the method transferred or accessed, or to a service related to custom computer software that:
      1. would otherwise be taxable by virtue of this title;
      2. must 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 necessary to perform the functions required for the software to function as intended; and
      4. do not constitute a mass produced program, procedure or documentation sold to:
        1. the general public; or
        2. persons exercising a trade, profession or industry, except in the cases provided for in point (3) of this paragraph.

Tax Tip No.29 – Revised

On June 3, 2021, the Monitor released a revised version of Tax Tip # 29. The revised version incorporates the changes from SB 787 and also provides many explanatory examples. In particular:

  1. Gift cards and gift certificates. Gift cards and gift certificates with monetary value are not taxable digital codes when redeemable for an item other than a digital product. The Controller describes three examples of when gift cards and gift certificates are taxable.
  2. Services performed electronically. According to SB 787 and COMAR 03.06.01.01 (A), Maryland excludes from tax as digital products certain personal, professional or insurance services that involve the sale of a digital code or a digital product as only element of no consequence for which no separate charge is invoiced. The supervisor interprets these non-taxable services as those rendered, for example, by doctors, dentists, lawyers, accountants and insurance agents. The examples show that the following are not taxable: (1) unlisted PDF files of estate planning documents provided with legal services; (2) reports generated as a result of a job seeker’s reference check; (3) posting job offers online; and (4) a telehealth appointment.
  3. Advertising agencies. Advertising agency contracts can relate to both non-taxable services and the production of tangible personal property or a digital product. The Controller lists five non-taxable advertising services: (1) preparation and placement of media advertisements; (2) public relations; (3) organize press conferences; (4) conduct market research; and (5) development of creative concepts. However, advertising agencies sell digital products when the transaction involves the production and delivery of specific goods, including digital photographs, illustrations, illustrations, graphics and videos.
  4. Education. The Controller has published numerous examples of cases where continuing education courses, seminars or conferences delivered electronically – including those by non-profit organizations – or online courses and conferences delivered by schools are submitted. to sales tax.
  5. Entertainment. Digital downloads and streaming of pre-recorded films, video clips, news and entertainment programs, live events including live concerts, sporting events and tutorials are subject to restrictions. sales and use taxes as digital products.
  6. Data and documents and electronic communications. The Controller applies sales and use tax on digital products to: (1) the sale of customer lists, mailing lists, medical records and similar products and (2) access fees or d subscription to a chat room, discussion room, blog, or any other place allowing users to communicate electronically in real time.
  7. Software. Generally, software is subject to Maryland sales and use tax. However, some software is not taxable as long as it requires “significant creative input to customize, configure or modify the procedures and programs necessary to perform the functions required for the software or SaaS to function as intended. subject to sale. and use the tax. Business tax advice # 29 (June 3, 2021) at n. 41, citing Md. Code Ann., Tax-Gen. § 11-219 (b). In addition to numerous examples, the Monitor has published a long list of potentially non-taxable “custom, configured or modified” software, including:
    1. Ledger systems;
    2. Budgeting and forecasting systems;
    3. Supplier management and payment systems;
    4. Tax engine, procurement and compliance systems;
    5. Human resource management systems;
    6. Data management systems;
    7. Software and systems for hosting, archiving and retrieving data;
    8. IT infrastructure and application management systems;
    9. Reservation systems, including hotel reservation systems and event management systems;
    10. Collaboration, videoconferencing, electronic mail and messaging systems; and
    11. Etc.
  8. Sales of digital codes and products before the effective date. As a general rule, sales and use tax does not apply to sales or subscriptions entered into before March 14, 2021. The examples state that: (1) for subscriptions that renew monthly, no sales tax and use will not be due until the first charge occurring after March 14, 2021, and (2) no sales and use tax is due for contracts entered into before March 14, 2021, even when delivery and Payment for these digital products does not take place until after March 14, 2021.

The Eversheds Sutherland SALT team will continue to monitor Maryland sales and use taxes on digital products and any further revisions of Tax Tip # 29.


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