Article
Texas and Maryland pass sales tax changes for specific technology services
Jun 25, 2025 · Authored by Shannon Bonner, Shannan Gilmartin Cuddy, Jim Byrnes
Generally, when sales and use tax statutes and regulations were originally enacted, the sale of tangible personal property was the focus. However, as businesses continue to grow and evolve, states have started to expand the application of sales tax to technology products and services.
This expansion has been slow but steady as states attempt to keep pace with the ever-growing sales of technology products and services by businesses to serve their customers. These updates include both enacted and proposed changes across multiple states concerning various technology sales, including data processing services, digital products and computer software and services.
Outlined below are examples of recent technology changes that may significantly impact the taxability of a business's sales in a particular state.
Texas: Data processing and marketplace facilitators changes
Effective April 2, 2025, Texas made significant changes to its data processing guidance found at 34 Tex. Admin. Code Sec. 3.330 (the Data Processing Rule). Specifically, the Texas Comptroller of Public Accounts (Comptroller) proposed amendments to the Data Processing Rule in September 2024, and upon review of written and public hearing comments in response to the proposed changes, the Comptroller adopted the final version of the rule changes on March 28, 2025. The changes include clarification of existing definitions, addition of new definitions and examples of taxable and non-taxable data processing services.
The adopted version of the Data Processing Rule includes an updated definition of data processing services with specific services excluded from the data process services definition including, internet access services, the transcription of medical dictation by a medical transcriptionist, the display of a classified advertisement or link on an internet website owned by another person and payment processing. Taxable data processing services now include internet hosting, streaming video subscriptions and website creation, repair and maintenance when they involve the storage, manipulation, compilation and entry of data.
Additional changes, among other items, included added provisions related to marketplace facilitators and ancillary data processing services. Specifically:
A. Marketplace facilitator changes:
When initially proposed, the Comptroller stated the changes to the Data Processing Rule, among other things, are meant to “help online marketplaces understand their responsibilities” relating to data processing services to marketplace sellers. Specifically, the online transactions include “two purchasers, two sales contracts and two taxable transactions. The purchaser of goods or services through a marketplace pays sales tax on the goods or services purchased. And the marketplace seller, who is purchasing data processing services from the marketplace provider, pays sales tax on those services.”
The Data Processing Rule now includes a new provision regarding marketplace providers which states: “marketplace provider services may be included in taxable data processing services when they involve the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information provided by the purchaser or the purchaser's designee. For example, services provided by a marketplace provider to its marketplace seller that store product listings and photographs, maintain records of transactions, and compile analytics are taxable data processing services.” This provision is effective Oct. 1, 2025, to allow the Texas Legislature time to consider addressing this issue further.
B. Ancillary data processing services changes:
The Data Processing Rule now includes a new provision detailing that a data processing service will not be taxable if it is sold for a single charge with another service, so long as that “data processing service does not have a separate value and the data processing service is ancillary to the other service.” The burden is on the taxpayer to demonstrate that the data processing service does not have a separate value and is ancillary to the other service. The Data Processing Rule provides guidelines on this determination including: “the Comptroller will consider whether the services are distinct and identifiable and whether each service is of a type that is commonly provided on a stand-alone basis or commonly provided as an additional service for a greater single charge.”
Further, “the comptroller may consider the extent to which the service provider exercises discretion or judgment in individual applications of the processed data based on knowledge of the physical sciences, accounting principles, law, or other fields of study. The routine or repetitive manipulation of data by the seller is a factor suggesting that the data processing activity is not ancillary to another service and should be taxable as a data processing service.” Notably, the evaluation is based on what the service provider is doing, not what the customer wants (i.e. not the essence of the transaction test which focuses on what the buyer wants).
Maryland: 3% sales tax on data and information technology services
HB 352 includes a 3% sales tax on data and information technology services through an expansion of the definition of taxable services. The legislation expands the definition of “taxable services” for sales and use tax and will apply to the following:
- (14) A data or information technology service, as described under NAICS Sector 518, 519, 5415; or
- (15) A system software or application software publishing services, as described under NAICS sector 5132.
NAICS means the Noth American Industrial Classification System, United States Manual, 2022 Edition, published by the United States Office of Management and Budget. A short description of the above NAICS codes includes:
Further pursuant to the bill, the retail sale a taxable service as described above under (14) or (15) above “shall be presumed to be made in the state in which the customer tax address is located.”
This bill was approved by the Governor on May 20, 2025, and will be effective starting July 1, 2025.
Update: Guidance issued by Maryland in response to the new 3% sales tax on specific technology services
Maryland has recently published emergency draft regulations and Technical Bulletin 56 (TB 56) clarifying several issues related to the upcoming sales tax changes for software as a service (SaaS) and related computer services effective July 1, 2025. The bulletin provides more specific guidance with detailed example scenarios explaining which services are impacted by the law change, how the timing of the changes impact existing contracts, and the potential implications for contractors. Additionally, the draft regulations and TB 56 provide extensive lists of services that fall under each NAICS code included in the statute.
Services subject to tax
The bulletin outlines how SaaS is impacted by the upcoming law change. SaaS for individual use will remain taxable at 6%. SaaS sold for commercial purposes in an enterprise computer system will be subject to the new 3% rate. The new law also repeals the exemption for custom software and custom SaaS. Detailed lists of services subject to the new tax can be found in TB 56, and impacted services include application hosting, cloud storage, cloud computing, and computer software consulting, among many others.
Timing of the changes
The law is effective July 1, 2025. Generally, if a contract is signed before July 1, 2025, the work done under that contract is not subject to these tax changes, even when the work is completed after July 1, 2025. If a contract has multiple phases, as long as the original agreement is signed pre-July 1, 2025, work done under all phases of the original agreement is generally not subject to the new tax rules. However, if a change order occurs after July 1, 2025, the new tax rules would apply to work done under the change order. For subscription agreements, (even if signed before July 1, 2025) the new tax rules apply to any payment due from July 1, 2025, forward since each subscription payment is viewed as a separate sale.
Both the emergency draft regulations and TB 56 provide examples related to the imposition of the new tax based on the contract terms. As such, existing contracts should be reviewed in detail.
Impact on contractors and exempt entities
Generally, a prime contractor contracting with an exempt entity would not be charging Maryland sales tax on these taxable services. However, a subcontractor to a prime contractor working with an exempt entity can only accept a resale certificate for purchases of taxable services if the taxable services are to be sold in their original form to the end user. If the prime contractor uses or changes the services sold to them by the subcontractor and does not sell them in their original form to the exempt entity, the prime contractor is viewed as the end user of the service, with tax applying on the transaction between the subcontractor and the prime contractor.
Generally, a seller cannot accept a Maryland resale certificate without a Maryland sales and use tax registration number. If a buyer wants to purchase services that are now taxable as exempt sales for resale using a Maryland resale certificate, they should consider registering in Maryland for sales and use tax purposes in order to obtain a sales and use tax registration number.
What’s next?
Businesses that provide technology services should review the above changes in detail, as they may have a significant impact on the taxability of such services and ultimately a business's sales and use tax liability. If you have any questions, please reach out to your Baker Tilly state tax advisor.
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.
