Maryland: Update on Digital Advertising and Digital Products Corrections Bill

Legislation is pending in Maryland (Senate Bill 787) that revises tax laws enacted earlier this year when the General Assembly overrode vetoes of two 2020 bills.  Importantly, Senate Bill 787 would push the effective date of the tax on gross revenues from digital advertising services to tax years beginning after December 31, 2021. Currently, the tax is effective for tax years beginning after December 31, 2020.  This is of particular importance to companies subject to the digital advertising tax, as the first estimated payment is due April 15, 2021. Senate Bill 787 would also redefine “digital advertising services” to exclude services of broadcast entities and news media entities. The bill defines “broadcast entity” to include “any entity primarily engaged in the business of operating a broadcast television or radio station.” “News media entity” is defined to include “any entity primarily engaged in the business of newsgathering, reporting, or publishing articles or commentary about news, current events, culture, or other matters of public interest.” The definition specifically excludes entities that primarily republish third-party content. Amendments to Senate Bill 787 also prohibit taxpayers subject to the digital advertising tax from directly passing the cost of the tax on to their customers by means of a separate fee, surcharge, or line-item.

Senate Bill 787 also makes several amendments to the 21^st Century Economy Sales Tax Act (House Bill 932), which expanded Maryland’s sales and use tax to digital products, digital codes, and streaming services.  After the veto override, the Maryland Comptroller’s Office released Business Tax Tip #29 “Sales of Digital Products and Digital Code,” which rather surprisingly interpreted the Act as extending the sales and use tax to receipts from electronically delivered software and remotely accessed software, as well as access to online content and certain educational online or streamed educational offerings.

As amended by Senate Bill 787, a “digital product” would not include certain prerecorded or live instruction by educational institutions, or certain types of live, interactive trainings, seminars, or discussions. The bill also makes numerous technical corrections to make clear that digital codes and digital products are both taxable, qualify for existing sales and use tax exemptions, and that all the provisions that apply to retail sales of tangible personal property also apply to sales of digital codes and products. The bill does not revise the Comptroller’s position that the taxation of digital products captures software however delivered or accessed. But, the bill makes clear that sales and use tax does not apply to the sale of custom computer software, however delivered or accessed, created for one person that contains  standard or proprietary routines requiring significant creative input to customize, configure, or modify the procedures and program that are necessary to perform the functions for which it is intended.  Finally, Senate Bill 787 makes a retroactive change to Maryland’s elective pass-through entity tax regime by not permitting a pass-through entity to deduct state and local taxes based on net income.   This change is effective for tax years beginning after December 31, 2019, which is when Maryland’s elective pass-through entity regime became effective. As of the morning of April 12, 2021, Senate Bill 787 was pending in the Senate to approve the House amendments. Please contact Dan McGuire with questions on Maryland Senate Bill 787.