Maryland’s HB0352 subjects an expanded list of services to a new 3% sales tax — including software, hosting, data processing, and information technology services. Additionally, this Budget Reconciliation and Financing Act (BRFA) increases individual income tax rates, imposes a 2% capital gains surcharge, and amends the pass-through entity tax calculation.
The sales tax changes generally take effect July 1, 2025, while the income tax changes are effective for taxable years after Dec. 31, 2024. Draft regulations are expected to be published July 11, 2025. Proposed emergency regulations were published on June 6, 2025.
Expansion of taxable services
Services described under the following North American Industry Classification System (NAICS) sectors or subsectors are subject to the new 3% sales tax:
System software or application software publishing services described in NAICS code 5132
Sales of data or information technology services
Data or information technology services in this case include:
Data processing, hosting, and related services as described in NAICS code 518
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
NAICS code 519
Computer systems design and related services outlined in NAICS code 5415
Services that meet these definitions are taxable, regardless of whether a business reports these sectors as their primary business activity code.
If services provided also fall into the definition of other taxable items or services that are subject to the general 6% sales tax rate, the higher rate will apply. For example, Software as a Service (“SaaS”) meets the definition of both a digital good and a software publishing service. The definition of a digital good excludes SaaS purchased solely for enterprise use. SaaS that isn’t purchased solely for enterprise use is subject to the 6% rate. To the extent SaaS is a taxable service for commercial use, it will be subject to the 3% rate.
Timing matters
Maryland published draft emergency proposed regulations on June 6, 2025, and Technical Bulletin No. 56 on June 10, 2025. In addition to elaborating on the taxable services above, these updates provide definitions of subscription sales, installment sales, and credit sales and provide many examples detailing when the tax is or isn’t due based on the contract date, purchase date, or renewal date. Generally, contracts and installment sales entered into before July 1, 2025, won’t be subject to the tax, but subscription payments will be considered separate sales and subject to tax where payments are due after July 1, 2025.
When are services exempt from this new tax?
Sales of services noted above are exempt when sold:
To a qualified cyber security business
To a qualified company located in an emerging technology development area
By a qualified company located in an emerging technology development area
A qualified cybersecurity business is an entity organized for profit that’s engaged primarily in the development of innovative proprietary cybersecurity technology or the provision of cybersecurity services.
A qualified company is a company that contracts with the University of Maryland’s Applied Research Laboratory for Intelligence and Security to develop systems and technologies to advance the use of quantum computing.
An emerging technology development area means the University of Maryland’s Discovery District located in Prince George’s County.
In addition to the above exemptions, buyers of these services may provide a seller a multiple points of use (MPU) certificate, shifting the responsibility of collecting and remitting the tax from the seller to the buyer. For services that can be used in more than one jurisdiction at a time, the buyer should consistently and reasonably apportion the use of the services.
Additionally, when MPU includes services for resale to a member of an affiliated group, the reseller must either absorb and pay the tax apportioned to Maryland or be liable for the tax if the related entity does not pay.
Other items in the BRFA
The BRFA was intended to close a $3 billion state deficit and addresses a range of business and personal taxes and fees as it seeks to do this.
New and repealed sales tax exemptions
Several exemptions will be repealed, specifically:
Snack foods, including chips, popcorn and nuts
Precious metal bullion or coins over $1,000
Photographic material used in producing another printed item
New exemptions include:
Sale of cannabis between licensed cannabis business and registered cannabis nursery
Cannabinoid beverages are excluded from the definition of food
Fee and excise tax increases
The BRFA includes the following fee and tax increases:
Vehicle excise tax increase from 6% to 6.5%
Cannabis sales tax increase from 9% to 12%
Sports betting tax increase from 15% to 20%
Vehicle emissions inspection fee from $14 to $30
New short-term rental vehicle tax of 3%
New tire fee of $5 per tire
Personal income tax
Changes to the personal income tax include adjustments to bracket, rates, standard deduction, and itemized deductions, meant to increase Maryland revenue. There are two new tax brackets and rates for high earners: 6.25% for incomes between $500,001 and $1 million for individuals or $600,001 and $1.2 million for joint filers and 6.5% for incomes exceeding $1 million for individuals or $1.2 million for joint filers. Additionally, there is a phaseout of itemized deductions for those earning more than $200,000 in federal adjusted gross income (AGI).
Capital gains surcharge
The BRFA imposes a 2% surtax on net capital gains included in Maryland AGI if federal AGI exceeds $350,000. Certain gains are excluded, such as a primary residence sold for less than $1.5 million, assets held in cash, IRAs and some livestock, land, and property.
Pass-through entity (PTE) tax
The BRFA includes amendments that if a PTE elects to pay tax on behalf of its members, the resident member’s tax liability will not be apportioned, but based on the PTE’s total income. The non-resident member’s tax liability will be based on the PTE’s Maryland apportioned income. This is effective for tax years beginning in 2026. Further updates are expected in the next legislative session that could address special elections and allocations.
Next steps
Businesses who sell these taxable services may need to open or add a sale and use tax account and prepare to collect and remit taxes, unless one of the stated exemptions apply to all of their sales.
Purchasers may also see sales tax included on invoices for purchases of these services after July 1, 2025. To the extent applicable, they should consider an MPU certificate.
Individuals should evaluate the timing of capital gains, evaluate itemized deductions, and review withholding and estimated payments.
All Maryland business and individuals should stay informed on legislative developments to understand how BFTA may impact their finances.
