On May 27, 2022, Maryland H.B. 791 became law without the signature of the state’s governor.1 The bill excludes certain computer software and software-as-a-service (SaaS) from taxation as digital products.2 The new law, effective July 1, 2022, accomplishes this by amending the definition of “digital product” to exclude certain types of enterprise-level computer software or SaaS from taxation.3 In addition, the law excludes certain digital products from taxation where purchaser holds a copyright or intellectual interest and is used in commercial purposes.4
H.B. 791 was introduced to fix unintended consequences from the passage of H.B. 932 in 2020, which placed Maryland among a growing list of states that taxed digital products delivered electronically. After passage of H.B. 932, it appears the legislature determined that the law inadvertently applied to products that historically were not subject to tax, such as enterprise-level software or digital inputs. The sponsor of H.B. 791, Eric Luedtke, provided the following testimony during Committee:
“The intention of House Bill 932 was to tax products which the sales and use tax previously applied to when physically bought and sold. But since this update was a novel measure, some products that were not previously taxed ultimately found the sales and use tax applying to them. Some corrective language was passed during the 2021 Legislative Session to address this and House Bill 791 seeks to make further technical corrections. This legislation seeks to clarify that purchases of computer software, software as a service (SaaS), and other similar service models used in an enterprise computer system, where the software is purchased exclusively for commercial services, remain non-taxable.”
Pursuant to the provisions of H.B. 791, the term “digital products” now does not include the following:
- a product having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities where the purchaser holds a copyright or other intellectual property interest in the product, in whole or in part, if the purchaser uses the product solely for commercial purposes, including advertising or other marketing activities;5 or
- computer software or SaaS purchased or licensed solely for commercial purposes in an enterprise computer system, including operating programs or application software for the exclusive use of the enterprise software system, that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, the software vendor, or a third party.6
We recommend taxpayers 1) review their upcoming enterprise-level software purchases, including SaaS purchases, to determine if contracts for such software should be postponed until after the new law goes into effect on July 1, and 2) reach out to their software providers to assess whether Maryland sales tax is imposed on these transactions beginning July 1. Taxpayers also should understand that downloaded software remains subject to tax in Maryland. Reviewing upcoming purchases/licenses of expensive enterprise-level software transactions in Maryland ahead of the July 1 effective date is critical. Failure to plan for this upcoming Maryland taxability change could lead to significant cash tax payments on nontaxable software.
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- 1To become law, a bill typically requires the signature of Governor or legislative override of the Governor’s veto. However, a provision in Maryland’s Constitution permits the passage of H.B. 791 without the Governor’s signature. Maryland Const. art. II, § 17(c).
- 2Maryland Code Ann. Tax-Gen. § 11-101(c-4)
- 3Maryland Code Ann. Tax-Gen. § 11-101(c-4)(3)(v)
- 4Maryland Code Ann. Tax-Gen. § 11-101(c-4)(3)(vi)
- 5Maryland Code Ann. Tax-Gen. § 11-101(c-4)(3)(v)
- 6Maryland Code Ann. Tax-Gen. § 11-101(c-4)(3)(vi)