Is SaaS Taxable in Maryland? A Review of State Tax Law

Software as a Service, commonly known as SaaS, represents a modern method of delivering software applications over the internet. Instead of purchasing and installing software on individual computers or servers, users access these applications through a web browser or mobile app, with the software vendor managing the underlying infrastructure, maintenance, and updates. This model has gained widespread adoption across various industries and for personal use due to its flexibility, scalability, and often subscription-based pricing. Businesses leverage SaaS for everything from customer relationship management (CRM) to accounting, while individuals use it for streaming media, productivity tools, and communication platforms. This article clarifies the taxability of SaaS within Maryland, providing information for both providers and consumers of these digital services.

Maryland’s Sales and Use Tax on Digital Products and Services

Maryland imposes sales and use tax on various digital products and services, including Software as a Service. The general sales and use tax rate in Maryland is 6% on most taxable purchases. However, a new 3% sales and use tax rate on certain digital services, including some SaaS, will become effective July 1, 2025.

This 3% rate applies to services described under specific North American Industry Classification System (NAICS) codes. These include software publishing (NAICS 5132), computing infrastructure providers, data processing, web hosting, and related services (NAICS 518), and computer systems design and related services (NAICS 5415). If a sale of SaaS meets the definition of both a digital product and a taxable service, the higher rate is applied.

SaaS generally falls under the category of “digital products” or “specified digital services” under Maryland law. While some SaaS might be taxed at the standard 6% as a digital product, certain business-to-business (B2B) SaaS transactions will be subject to the 3% rate effective July 1, 2025. This applies particularly to those used in an enterprise computer system.

Defining Taxable Software as a Service in Maryland

Maryland defines taxable SaaS based on specific characteristics. SaaS is generally considered taxable when accessed remotely, not downloaded, and the vendor maintains control over the software.

For individual consumers, SaaS is taxed at the standard 6% sales tax rate. Examples include cloud-based productivity suites, streaming entertainment platforms, and personal financial management tools.

For business users, the taxability of SaaS can vary depending on its specific use. Effective July 1, 2025, SaaS purchased for use in an enterprise computer system for commercial purposes will be subject to a 3% sales and use tax. This includes operating programs or application software exclusively used within an enterprise system, regardless of who hosts it.

Services not considered taxable SaaS include custom software development, where software is specifically designed for a client’s unique needs. However, with changes effective July 1, 2025, many professional services that use software, such as IT consulting, web design, or data processing, will also become taxable at the 3% rate if they fall under specified NAICS codes. The exemption for customized, configured, or modified SaaS is repealed as of July 1, 2025, making these products and services taxable.

Calculating and Remitting Sales Tax on SaaS

Businesses providing taxable SaaS in Maryland are responsible for calculating, collecting, and remitting the appropriate sales tax. The sales tax is applied to the total charge for the service, whether it is a one-time fee or a recurring subscription payment. For subscription-based services, each payment made after the effective date of the tax change (July 1, 2025) is considered a separate taxable sale.

Vendors must register with the Maryland Comptroller’s Office to obtain a sales and use tax license before collecting tax. This can be done online through the Comptroller’s Combined Registration Application. There is no fee to register for a sales tax permit in Maryland.

Once registered, businesses are assigned a filing frequency, which can be monthly, quarterly, or annually, based on their sales volume. Sales tax returns and payments are generally due by the 20th day of the month following the reporting period. Even if no tax was collected during a period, a “zero return” must still be filed to avoid potential penalties.

Exemptions and Specific Scenarios

Certain exemptions and specific scenarios may apply to SaaS transactions in Maryland. One common exemption is for resale. If a business purchases a SaaS product with the intent to resell it, the initial purchase may not be subject to sales tax, provided the purchaser provides a valid resale certificate to the vendor.

Exemptions can also apply to specific entities, such as governmental agencies, certain non-profit charitable, educational, and religious organizations, volunteer fire companies, and credit unions. These organizations need to provide an exemption certificate to the vendor at the time of purchase.

Nexus is a key consideration for remote SaaS providers. Maryland has both physical and economic nexus requirements. Economic nexus is established if a remote seller has gross revenue exceeding $100,000 from sales of tangible personal property or taxable services into Maryland, or engages in 200 or more separate transactions within the state during the current or previous calendar year.

For Maryland residents or businesses purchasing taxable SaaS from out-of-state vendors who do not collect Maryland sales tax, use tax implications arise. Use tax is imposed on items purchased outside the state but used, stored, or consumed within Maryland, and the rate is generally the same as the sales tax rate. The purchaser is responsible for remitting this use tax directly to the state. Additionally, a Multiple Points of Use (MPU) certificate can be provided by buyers who know a digital product or service will be used both inside and outside Maryland, allowing them to apportion the tax liability.