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Maryland Comptroller Issues More Guidance on Sales Tax Expansion to Digital Products

Posted on June 4, 2021

The Maryland comptroller's updated guidance on the state’s sales and use tax expansion to digital products and digital code adds clarity but still leaves some issues unsettled.

The comptroller republished Business Tax Tip #29 on June 3 to reflect the passage of S.B. 787, which was enacted without Republican Gov. Larry Hogan’s signature.

The bill clarified which existing sales and use tax exemptions apply to digital products and digital codes. It changed the definition of digital product to exclude some types of digital instruction, seminars, discussions, and professional services. It also changed the definition of digital code.

The guidance was first issued March 9, 2021. Maryland expanded its sales and use tax to digital products and digital code earlier this year when the General Assembly voted February 12 to override Hogan’s veto of H.B. 932.

Karl Nicolas, associate director at EY, told Tax Notes the main concern he and his colleagues had with the comptroller’s initial guidance was regarding electronically delivered software and software as a service.

Nicolas said one helpful thing the updated guidance does is give a much more expanded definition of what constitutes exempt custom software.

Nicolas said it seems like the comptroller is saying services provided electronically aren’t going to be subject to tax, unless there’s a specific enumeration in the tax code. “I still think we’re going to need some more clarification from the comptroller on that,” he said.

DeAndré Morrow of Reed Smith LLP told Tax Notes he is not completely sold on the comptroller’s interpretation that the definition of digital products and digital code as articulated in the statute encompasses software as a service.

However, Morrow said he thinks the comptroller did a good job at providing guidance on semi-custom software based on comments that have been made by legislators that haven’t been necessarily captured in the statute.

Morrow explained that during the legislative session committee meetings regarding the portions of S.B. 787, he kept hearing the term “semi-customized” software and “enterprise software” thrown around when the modifications to Maryland Tax General Article 11-219(b) were being mentioned. 

"However, the revisions are not what I would consider the clearest articulation of that intent. I was hoping that the comptroller’s office would elaborate, and I think that they did a good job. I’m particular happy that they made certain to include a non-exhaustive list to demystify 'semi-customized' software," Morrow said.

“That’s going to go a long way in providing clarity for taxpayers,” he added.

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