Maryland sales tax now applies to digital products and SaaS

Digital products and Software as a Service (SaaS) are subject to Maryland sales and use tax as of March 14, 2021. This significant policy change likely took many businesses and consumers by surprise, though it’s been on the docket for more than a year.

The tax was initially enacted in March 2020 and set to take effect July 1, 2020, but was vetoed by Governor Larry Hogan in May, along with a tax on digital advertising services. In his veto message, the governor called the bills “misguided” for raising taxes and fees on Marylanders “at a time when many are already out of work and financially struggling.”

Undaunted, the Legislature overrode the veto in mid-February 2021 (as well as the veto on the digital advertising tax). The tax on digital products took effect 30 days after the override vote, on March 14, 2021. Businesses had little time to prepare.

Update: On April 12, 2021, the Maryland General Assembly passed S.B. 787, which amends and clarifies how sales tax applies to digital products and services. It takes effect retroactively, on March 14, 2021. 

Which digital products are subject to sales tax in Maryland?

House Bill 932 extends Maryland’s sales and use tax to “certain digital products” obtained electronically or delivered through digital, electrical, electromagnetic, magnetic, optical, wireless, or similar technology. Tax applies to digital products unless a statutory exemption applies.

The following digital products are among those subject to sales and use tax (this is not an exclusive list):


Applications (apps)

  • Digitized sound files (e.g., ring tones)


Interactive communication and entertainment 

  • Access to chat room discussions, weblogs, or similar forums where users communicate electronically in real time
  • Access to/use of video or online games
  • Access to/use of virtual items purchased for use in a video or online game


Education and instruction

  • Digital downloaded or streamed tutorials
  • Prerecorded continuing education classes delivered electronically

Charges for conferences, continuing education classes, or seminars are generally taxable if prerecorded and delivered electronically; live instruction delivered electronically is generally exempt. 

Digital products don't include prerecorded or live instruction by a public, private, or parochial elementary or secondary school, or by a public or private institution of higher learning. 

There’s no exemption under Maryland law for the sale of a digital product on the basis that the product would have been exempt if it had been delivered in tangible form. Likewise, there’s no exemption for continuing education classes sold by a nonprofit or tax-exempt organization, except for sales by "a bonda fide church or religious institution, if the sale is made for the general purposes of the church or organization."

When instruction is in person, the provider must pay the tax due on educational materials provided incidentally with the nontaxable educational program. However, the provider isn’t required to pay sales tax on the purchase of materials provided incidentally with a taxable educational program; these are resold to the customer, who pays the tax.

Both tangible and electronic textbooks are taxable in Maryland, as is the purchase of a code to view or download an electronic book. Tax applies regardless of whether the sale is made by an educational institution or commercial vendor.



  • Digital downloaded or streamed entertainment or news (e.g., movies, programs, live events, sporting events)
  • Prerecorded or live music, performances, or speeches
  • Prerecorded or live audio books or other written materials

Charges to view a live performance of any type in person are exempt from sales and use tax, but live performances may be subject to Maryland’s admissions and amusement tax.


Reading materials

  • Books or ebooks
  • Magazines, newspapers, periodicals, or other publications



Canned or commercial off-the-shelf (COTS) software delivered in tangible form has been taxable since before March 14, 2021. Starting March 14, electronically delivered COTS is also subject to Maryland sales tax, even if adapted to the needs of a particular user.

In addition, Software as a Service (SaaS) is taxable as of March 14, 2021.

Yet many custom computer software services remain exempt, including: those that are otherwise subject to sales and use tax; those that are used by a specific person and created for that person (or significantly customized for that person); and those that don’t constitute a program, procedure, or documentation that’s mass produced and sold either to the general public or persons associated in a trade, profession, or industry.

The Maryland Comptroller says “vendors should consider the cost of the customization as compared to the cost of the COTS software” when determining whether software qualifies for the customized computer software exemption.

The fact that Maryland is now taxing some previously exempt software and SaaS comes as a bit of a surprise, as there’s no mention of software in HB 932.

As KPMG notes, “In most states, the definition of ‘digital products’ does not include software, which is taxed separately under state law. Likewise, capturing ‘access to online content’ (presumably including access to various databases and research products) as a taxable digital product may catch providers off-guard because most states taxing such items do so as either an information service or a software application.”

The fact that businesses had so little time to address the new taxability rules merely exacerbates the problem. The Maryland Comptroller issued its guidance (Business Tax Tip #29) on March 9, mere days before the new tax requirements took effect.



  • Sales, subscriptions, or licenses to access content online
  • Sales, subscriptions, or licenses to use a software application



  • Audio or video greeting cards sent by email, text, or other electronic means
  • Customer lists, mailing lists, medical records, and similar products
  • Design files, models, and templates, such as 3D design files, 3D models, CNC templates, and virtual/alternate reality templates
  • Photographs, artwork, illustrations, graphics, and similar products


Digital codes

Digital codes that provide a buyer with a right to obtain one or more digital products are also now subject to Maryland sales and use tax. They’re often obtained from a tangible card or via email or text, though they may be obtained by any means. The Maryland Comptroller reminds that gift cards and gift certificates with a monetary value (redeemable for an item other than a digital product) are not considered digital codes and are therefore not subject to Maryland sales tax.

Subscriptions to access, stream, or purchase a digital code to receive or access digital products are also taxable. A subscription is an arrangement with a vendor that grants a buyer the right to obtain digital products from within one or more categories with the same tax treatment (i.e., taxable or exempt), for a fixed period, in a fixed quantity, or both.

Annual, monthly, or periodic subscriptions are taxable so long as the purchaser is permitted to access a product; the product doesn’t have to be delivered. In other words, sales tax applies to subscription fees even when no content is downloaded or streamed.

Marketplace sales of digital products

Maryland generally requires marketplace facilitators to collect and remit the tax on behalf of third-party sellers. Facilitators are responsible for third-party sales of digital products if the marketplace facilitates retail sales by listing or advertising for sale digital goods and tangible personal property.

Simply put, a marketplace that facilitates sales of digital goods only, and not sales of tangible personal property, isn’t required to collect and remit tax on its third-party sales of digital goods. However, marketplaces may elect to do so.

Out-of-state (and out-of-country) vendors

Maryland was one of the first states in the nation to enforce economic nexus after the Supreme Court of the United States found in favor of the state in South Dakota v. Wayfair, Inc. (June 21, 2018). Effective October 1, 2018, an out-of-state business (including non-U.S. companies) must register then collect and remit Maryland sales tax if it has 200 or more transactions of, or $100,000 in gross revenue from, tangible personal property or taxable services delivered into the state in the current or previous calendar year.

With the enactment of HB 932, the $100,000 sales/200 transactions threshold also applies to digital products or digital code. Thus, an out-of-state business must register to collect and remit Maryland sales tax if, in the previous or current calendar year, it has either:

  • More than $100,000 in gross revenue from the sale of digital products or digital codes delivered in Maryland; or
  • 200 or more separate transactions of digital products or codes for delivery into Maryland

How to determine what tax rate to charge

Maryland sales and use tax rates for sales of digital products are based on the customer tax address, to be determined as follows:

  1. The address of the business location (when the digital product is received by a buyer at the business location of the vendor)
  2. If not 1, then the primary use location of the digital product
  3. If not 1 or 2, then the location where the digital product is received by the buyer, or by a donee of the buyer identified by the buyer
  4. If not 1 through 3, then an address for the buyer obtained from the vendor’s business records
  5. If not 1 through 4, then the address for the buyer obtained during the consummation of the sale (including the address of the buyer’s payment instrument)
  6. If not 1 through 5, then the vendor must select one of the following locations and use it consistently:
    • The location of the vendor’s U.S. headquarters
    • The U.S. location where the vendor has the greatest number of employees
    • The U.S. location from which the vendor makes digital products available for electronic transfer

Companies in the business of selling digital codes, digital products, digital software, or SaaS may now be liable for Maryland sales and use tax. You can find more information from the Maryland Comptroller. Additionally, Avalara can help you collect the tax you owe in Maryland and other states

This post was updated in April 2021 and July 2022.

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