H.B. 932 expanded Maryland’s definition of a retail sale subject to sales tax to include the sale of certain “digital products”. A “digital product” is defined by the statute as “a product that is obtained electronically by the buyer or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities”. The statute goes on to list several examples of digital products, including digital music, e-books, and digital newspaper subscriptions, but software of any kind is not listed in the statute.

Many states have recently expanded their sales tax base to include “digital products” or “digital goods”. Typically, these states closely mirror the Streamlined Sales Tax (SST) approach which provides that “digital products” exist as a distinct and separate category from that of services, software, telecommunication services or tangible personal property. The SST guidance also limits digital products to digital audio files, digital video files, and digital books. While some states have somewhat expanded the SST’s list of digital products, they have typically honored the separation of “digital products” as a distinct category consisting of limited items that do not include software.

H.B. 932 by its terms appeared to follow that same approach and was not expected to extend the Maryland sales tax to tax SaaS. However, on March 9th, just before the bill was scheduled to take effect, the Maryland Comptroller issued guidance expressly stating that “digital products” did include the sale of canned software delivered electronically and SaaS.

Anrok observations and takeaways

The Maryland Comptroller’s guidance surprised everyone in the tax community by taking what appeared to be a standard expansion of the state’s sales tax to include “digital products'' and layering on an unprecedented broad interpretation of what a digital product includes. Pushback from the business community resulted in the pending Senate Bill 787, which narrows some of what the Comptroller’s guidance sought to tax in its interpretation. However, it does not curtail the extension of the sales tax to SaaS.

As many states look for ways to address budget shortfalls brought on by COVID-19, such broad interpretations of statutory language could be appealing. Many states are still just beginning to dip their toe into the 21st century with digital products, and many remain, at best silent and at worst unclear, with respect to how SaaS fits into their antiquated sales tax laws.

Talk to your tax advisor about whether you may have a sales tax obligation in Maryland.