Maryland to tax data and software services

Maryland needs more tax revenue. Broadening the sales tax base to include certain services will help the Old Line State fill a looming $3-billion budget gap.

The Maryland Legislature considered at least two different sales tax expansion proposals during the 2025 session: Taxing numerous business-to-business services at 2.5% (SB 1045), and taxing fewer services at 3% (HB 352). Governor Wes Moore signed a scaled-down version of HB 352 into law on May 20, 2025.

Maryland’s 6% sales and use tax currently applies to only select business-to-consumer (B2C) and business-to-business (B2B) services, including credit card reporting services, pay-per-view television, and security services.

Starting July 1, 2025, Maryland will apply a 3% sales and use tax to data or information technology services (NAICS 518, 519, and 5415), and system software or application software publishing services (NAICS 5132). The NAICS (North American Industry Classification System) codes identify the specific industries that will be impacted.

The 3% tax will apply to B2B as well as B2C transactions. And the 3% rate isn’t written in stone: The legislation allows for a higher tax rate “if a different rate ... could be applied to a sale or use of tangible personal property, a digital code, a digital product, or a taxable service.”

Initially, HB 352 sought to tax the licensing of media or software rights and other intellectual property as well. Had that not been cut from the bill, the 3% sales and use tax would have applied to the following services:

• Rights to produce and distribute computer software protected by copyright
• Rights to use intellectual property, including that protected by copyright or trademark
• Sporting event broadcast and other media rights
• Broadcast television programs
• Specialty programming content distribution
• Syndicated media content

The ill-fated SB 1045 sought to apply a 2.5% sales and use tax to the following services starting July 1, 2025:

• Accounting, bookkeeping, billing, or payroll services (NAICS 5412)
• Appraisal services (NAICS 541990)
• Consulting services (NAICS 5416)
• Data or information technology services (NAICS 518, 519, or 5415)
• Experimental development services (NAICS 5417)
• Financial planning or tax preparation services (NAICS 5239 or 5412)
• Heavy truck or bus repair services (NAICS 8111)
• Landscaping and nonresidential building or property maintenance services that aren’t already taxable (NAICS 561210, 5616, or 5617)
• Lobbying, public relations, or marketing services (NAICS 5418)
• Office support services that aren’t already taxable (NAICS 561110, 5614, or 561910)
• Permanent or temporary employee or contractor placement services (e.g., NAICS 5613)
• Photography, design, or printing services (NAICS 541420, 541430, or 541490)
• Repair services (NAICS 8112 or 8113)
• Sport or performing art advertising services
• System software or application software publishing services (NAICS 5415)
• Valet or parking services, other than a public parking garage (NAICS 812930)

The fiscal analysis for SB 1045 estimated that taxing these services at 2.5% (rather than the 6% general sales tax rate) would increase state revenues by about $944.1 million in fiscal year 2026 and $1.4 billion in fiscal year 2030.

Representatives from numerous businesses and organizations urged the Legislature to reject SB 1045. Many said taxing these services would be particularly hard on small businesses that need to purchase the affected services; larger businesses often handle many such tasks in-house.

In the end, the Legislature decided against such a broad B2B tax.

Even at a reduced rate, taxing B2B services is controversial. The Council on State Taxation argues that this tax proposal “violates several principles of sound tax policy” and creates “pyramiding and a lack of transparency to both consumers and policy makers.”

Brian Smith, Senior Government Relations Director at Avalara, explains the difference between taxing B2C versus B2B transactions. “I look at taxing B2C services as simply an expansion of the sales tax base. Taxing B2B services is different: It’s a tax on business inputs, the process of providing services to businesses.”

Smith says taxing the provision of services would be comparable to taxing the manufacture of products sold for resale. “Is the provisioning of services akin to manufacturing?” he asks.

Yet Maryland lawmakers were in a bind. Moody’s Ratings Agency predicts federal austerity measures to “pose a greater threat to Maryland … than to any other state.” Several members of the Budget and Taxation Committee said they didn't want to increase taxes, but they needed to increase revenue somehow.

While the state plans to trim more than $2 billion from its budget, it needs to increase tax collections by roughly $1 billion to balance its budget. Sales tax and income tax are the only two taxes big enough to generate that amount of revenue.

During a Budget and Taxation Committee discussion of SB 1045 (March 12, 2025), Maryland State Senator Shelly L. Hettleman called Maryland’s sales tax structure “woefully outdated.” While goods and services made up roughly an equal share of the economy (50% each) when Maryland introduced sales tax in 1947, goods comprised just 37% of Maryland’s economy in 1997 and 31% of the economy in 2022.

Taxing more services would produce a “diversified revenue stream,” said Hettleman, and provide “a stable source of income even during economic downturns.” That’s generally considered a positive, though it may not make the new taxes any more palatable for affected taxpayers.

Businesses facing new or changing sales tax obligations may be interested in learning how automating sales and use tax calculation, collection, and remittance can help streamline compliance.

This blog has been updated to reflect new developments.