Maryland Computer, Software, and SaaS Tax Guide

Prepared by Sales Tax Helper

Table of Contents

1. Introduction
2. Nexus Considerations
3. General Rules and Compliance Considerations
4. Specific Exemptions
5. Sourcing Rules
6. Audit Considerations
7. Voluntary Disclosure Agreements (VDAs)
8. Conclusion
9. References & Resources

1. Introduction

For software companies, SaaS providers, and technology firms conducting business in Maryland, the state's sales and use tax rules present unique challenges. Maryland distinguishes between hardware, prewritten (canned) software, custom software, and digital products based on their method of delivery and level of customization. Maryland's tax treatment of software and technology-related services depends on multiple factors, including whether software is delivered in tangible or electronic form, whether it is prewritten or custom, and whether the digital products are considered taxable under Maryland law.

Important Note for Maryland Technology Businesses: Unlike some states that maintain clear
exemptions for all digital products, Maryland significantly expanded its tax base in 2021 to
include digital products, Software as a Service (SaaS), Infrastructure as a Service (IaaS), and
Platform as a Service (PaaS). This makes understanding the nuanced classifications of your
technology offerings essential for proper compliance.

Purpose of This Guide

This guide is designed to help businesses navigate Maryland's sales and use tax rules related to software and technology services. It focuses on:

• Nexus Considerations: Understanding when businesses must register and collect
  Maryland sales tax due to physical or economic presence.
• Taxability of Software & Services: Clarifying the tax treatment of prewritten vs. custom
  software, cloud computing services, and related technology offerings.
• Sourcing Rules: Determining how and where transactions are taxed based on customer
  location and method of software delivery.
• Audit Considerations: Identifying common tax audit triggers and best practices for
  compliance.
• Voluntary Disclosure Agreements (VDAs): Explaining the process for businesses to
  rectify past noncompliance while mitigating penalties and limiting back-tax liability.

Why This Matters for Technology Companies

Maryland's sales tax laws impact software companies, SaaS providers, and technology firms in
multiple ways:

• Sales Tax Obligations: Businesses that sell software or related services to Maryland
  customers may have a duty to collect and remit Maryland sales tax, depending on how
  the product is classified. Failing to correctly collect tax on taxable products can lead to
  unexpected liabilities during an audit.
• Digital Products Complexity: Maryland taxes certain digital products, including SaaS,
  IaaS, and PaaS as of March 14, 2021, but excludes others, making proper classification of
  transactions essential to avoid tax liabilities. The line between taxable digital products
  and exempt professional services requires careful navigation.
• Compliance Risks: Failure to correctly assess and collect sales tax can result in
  significant penalties, interest, and extended audit exposure. The Comptroller of Maryland
  actively enforces compliance, particularly after major tax law changes like the 2021
  digital products expansion.

This guide will walk through Maryland's specific sales tax rules governing hardware, software,
SaaS, and technology-related services while referencing applicable statutes and Maryland
Comptroller guidance. Throughout the guide, official Maryland Comptroller sources will be
linked for further reference.

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