Sales Tax Rules and SaaS in Maryland

Maryland Declares SaaS Taxable

The hottest topic in the State & Local Tax community has been the emergence of tax laws surrounding the taxability of “Software as a Service” – or more commonly known as “SaaS.” In March 2021, Maryland’s Office of the Comptroller issued guidance on digital products and streaming tax, declaring that SaaS is taxable. This comes after the enactment of House Bill 932 that extends sales and use tax to digital products, codes, and streaming services.

Defining SaaS

Unlike digitally downloadable or tangible discs, SaaS products are accessed by users via the cloud. Specifically, this new guidance updates the definition of a Maryland retail sale to include the sale of “tangible personal property, a taxable service, a digital code; or a digital product.” Subsequently, sales and use tax applies to a sale of a digital code or product obtained or delivered electronically by an end-user, including subscriptions, access, receipt, and streaming of a digital code or product. Examples include e-newspapers, e-books, music and video streaming services, online video games, and more. Like many other states, Maryland will not apply sales and use tax to the sale of custom computer software, regardless of how the software is transferred or accessed by the end-user.

When to Collect

Businesses with these types of retail sales should first analyze when they established physical or economic nexus in the state. Remote sellers should collect and remit sales and use tax on all taxable sales of digital codes or digital products used in Maryland. This includes a person who sells digital codes or digital products for delivery in Maryland if they meet the state’s economic nexus threshold requirements (exceed $100K in annual sales, or have 200 or more transactions into the state).

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