Maryland Administrative Release 38 Explained
This guide clarifies Maryland's sales tax application to digital sales, helping businesses understand their responsibilities under Administrative Release 38.
Maryland expanded its sales and use tax to include digital products and certain digital services, effective March 14, 2021. Enacted under House Bill 932, the law extended the state’s 6% sales and use tax to a new category of transactions. The Comptroller of Maryland has issued guidance explaining the practical application of the tax law and the responsibilities of sellers. Subsequent legislation, like House Bill 791 effective July 1, 2022, has further refined these rules, narrowing the definition of taxable digital products and providing certain exclusions.
Defining Taxable Digital Products
The law applies to products created and delivered to the customer in an electronic format. These taxable digital products are pre-produced and not created specifically for a single customer. The tax applies regardless of whether the customer receives the right to permanently own the product or has a more limited license for its use.
Taxable digital products include:
- Electronic books, digital newspapers, magazines, and other periodicals.
- Digital audio files, such as purchased music downloads, podcasts, and digital audiobooks.
- Digital video files, like movies and television shows that a customer downloads and owns.
- Digital photographs, illustrations, and other artwork transferred electronically to the purchaser.
- Canned or commercial off-the-shelf software that is delivered electronically.
- Digital codes that are sold to a customer and provide the right to obtain other taxable digital products.
Understanding Taxable Digital Services
Maryland’s law also extends the sales tax to charges for accessing digital content and software. The distinction from a digital product is that the customer is paying for access to a platform or information, rather than taking ownership of a specific file.
A major component is the taxation of Software as a Service (SaaS), where software is licensed on a subscription basis and centrally hosted. Common examples include cloud-based customer relationship management (CRM) platforms, project management tools, and subscription-based graphic design software.
The tax also applies to streaming services that provide on-demand access to a library of movies, television shows, and music. Customers pay to stream this content rather than purchasing and downloading individual files.
Effective July 1, 2025, a new 3% sales and use tax will apply to a broad category of data and information services, including data processing, web hosting, and computer systems design. This is separate from the 6% tax on other digital products and services. An exclusion exempts SaaS purchased solely for commercial purposes within an enterprise computer system.
Sourcing Rules for Digital Sales
Determining if a sale of a digital product or service is subject to Maryland’s sales tax depends on the buyer’s location. The state has established a clear hierarchy of rules for sellers to source the transaction.
The primary rule is to source the sale to the customer’s business or home address if a seller has this information in their business records. If this address is not available, the seller must use the next step in the hierarchy.
This step involves using any other address for the customer that the seller may have on file, such as the address where the customer receives the product or service. Should the seller lack that address, the next option is to use the customer’s billing address.
If none of the preceding address information is available, the seller would then use any other address information provided by the customer, such as an address associated with their payment method.
Compliance for Sellers
Businesses selling taxable digital products or services to Maryland customers must comply with state tax laws, regardless of whether the business has a physical presence in the state. Sellers must obtain a Maryland sales and use tax license before they begin making taxable sales. This registration can be completed online through the Comptroller’s website.
After registering, the business is responsible for collecting the applicable sales tax from its Maryland customers at the time of the transaction. The collected sales tax must be separately stated on any invoice, receipt, or other sales document provided to the customer.
Finally, the seller must remit all the collected taxes to the state. This is done by filing regular sales and use tax returns, typically on a monthly or quarterly basis as determined by the Comptroller based on sales volume.