Maryland: Legislation Extending Digital Ad Tax Enacted; Guidance Issued on Digital Goods Taxation

Listen to a brief overview of state tax developments this week, including Maryland, or read full Maryland development below.

Detailed Maryland Development

Maryland Governor Larry Hogan has allowed Senate Bill 787, a bill that revises two significant tax laws enacted earlier this year, to become law without his signature. The Maryland General Assembly’s website indicates a May 30, 2021 enactment date. In February, the Maryland General Assembly overrode Gov. Hogan’s veto of Senate Bill 732 (2020 session), imposing a special tax on gross revenues received from digital advertising services in Maryland, and House Bill 932 (2020 session), expanding the sales and use tax base to certain digital products and services. Senate Bill 787 makes several amendments and technical corrections to those laws, including delaying the implementation date of the digital advertising tax.

Amendments to House Bill 732

Senate Bill 787 moves the effective date of the digital advertising tax to tax years beginning after December 31, 2021. As originally passed, the tax was effective for tax year 2020, and the first estimated payment of the tax was due April 15, 2021. Under Senate Bill 787, the first estimated payment will be due April 15, 2022. Senate Bill 787 also provides that taxable digital advertising services do not include advertisement services on digital interfaces owned or operated by, or operated on behalf of, television or radio broadcast entities or news media entities. A “broadcast entity” includes “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.” Finally, Senate Bill 787 provides that a person subject to the digital advertising tax may not directly pass on the cost of the tax to a customer by means of a separate fee, surcharge, or line item.

Amendments to House Bill 932

Under House Bill 932, titled the “21st Century Economy Sales Tax Act,” Maryland’s sales and use tax was expanded to digital products, digital codes, and streaming services, effective March 14, 2021. The Maryland Comptroller later released Business Tax Tip #29, “Sales of Digital Products and Digital Code,” which took an expansive view of the law, and specified the tax would apply not only on digital books, digital music, and digital audio visual works, but also to a wide range of other digital products and services, including access to online content, SaaS, software applications, online classes, and prerecorded or live speeches. In response to feedback from affected taxpayers, Senate Bill 787 somewhat narrows the application of tax in the case of certain products and services. Specifically, Senate Bill 787 provides that a “digital product” does not include:

  • Prerecorded or live instruction by public or private educational institutions;
  • Instruction in a skill or profession if the instruction is not prerecorded and features an interactive element;
  • Seminars, discussions, or similar events hosted by a nonprofit or business association if the event is not prerecorded and features an interactive element; and
  • Professional services obtained electronically or delivered through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

Senate Bill 787 also clarifies that tax does not apply to computer software that is “customized, configured or modified”, regardless of the method transferred or accessed, or to certain services relating to that computer software. The amendments in Senate Bill 787 clarify that custom computer software includes software that would otherwise be taxable under the law if it is created for or used by a specific person and requires significant creative input to customize, modify, or configure standard procedures and routines in the software to enable it to operate in the manner intended and required by the user. Under Senate Bill 787, sales tax will apply to electronically and remotely accessed “canned” software not meeting the definition of custom software that operates immediately as intended “out of the box.” Finally, Senate Bill 787 updates Maryland’s tax code to add the terms “digital products” and “digital code” to various provisions and definitions that already include the terms “tangible personal property” or “taxable service.”

On June 3, 2021, the Comptroller issued a revised version of Business Tax Tip #29 that reflects the changes made in Senate Bill 787. The revised document includes a number of new examples intended to provide greater clarity in certain areas where questions had been raised earlier. In particular, revised Tax Tip #29 states clearly that Maryland imposes sales and use tax only certain specifically enumerated services and that merely because a non-enumerated service may be performed or delivered electronically does not make it a taxable digital product. In addition, the transfer of a digital product to a customer as a part of the service does not make the service taxable if the digital product is an inconsequential element of the overall service. With respect to bundled transactions, the Tax Tip makes clear that if an invoice separately states the charges for non-taxable services and digital products, the services would not be taxable.

The revised Tax Tip also contains various examples to explicate the appropriate treatment under Senate Bill 787 of educational and instructional services by both for profit and nonprofit organizations as well as the revised custom software definition. Lastly, the revision does not include any mention of the sale of or subscription to online access to content being a taxable digital product, though further guidance is expected.

The effective date of the digital products legislation remains March 14, 2021. However, the Comptroller previously announced the due date of sales and use tax returns and payment of taxes for sales taking place in March, April, and May of 2021 is extended to July 15, 2021. This extension applies only to the date for filing and making remittances of sales tax due; it does not extend the applicability of the tax on digital goods, which remains March 14, 2021.

The Comptroller has not yet provided guidance on the digital advertising tax. Guidance to aid companies in determining who is subject to the tax and how revenue from digital advertising services are sourced, which was one of the key questions that many businesses and practitioners had about the law, is anticipated. Businesses subject to the tax will want to track these developments and keep an eye on litigation that has commenced in state and federal courts as to whether the tax violates the Internet Tax Freedom Act and/or the Due Process and Commerce Clauses.

Please contact Dan McGuire or Jeremy Jester with further questions on Maryland Senate Bill 787, the digital advertising tax, or the taxability of digital products and services.

This Week's Developments

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US