On April 7, the Maryland legislature passed the fiscal 2026 budget bill (HB 352) that makes important tax changes for specified technology services and high-income taxpayers.
Introduction of the Tech Tax
Effective July 1, 2025, the legislation introduces a 3% sales tax on sales of data and information technology services in Maryland. The tax is commonly referred to as the “tech tax” because it is meant to expand the definition of taxable services in Maryland to include those primarily found in the technology sector.
Most notably, Maryland will now tax:
- System software or application software publishing services described in NAICS Code 5132; and
- Sales of data or information technology services, including:
- Data processing, hosting, and related services as described in NAICS Code 518;
- Other information services as defined in NAICS Code 519; and
- Computer systems design and related services outlined in NAICS Code 5415.
The new taxes could apply to a range of services, including cloud storage and application hosting (such as Amazon Web Services, Wix, and Google Drive), web hosting and server management, video streaming support, and data backup and computer data storage services. The legislation also will impose taxes on web search portals; online directories; and services related to website and software development, IT consulting, software installation, and business software providers.
Sales of the services provided above to or by a company located in the University of Maryland Discovery District in Prince George’s County that contracts with the University of Maryland’s Applied Research Laboratory for Intelligence and Security to develop systems and technologies to advance the use of quantum computers are exempt from the tax.
The legislation clarifies that transactions are subject to either the reduced 3% tech tax or the regular 6% sales tax, but not both. If the sale of any of the services noted above could be classified as a sale of taxable tangible personal property or of a digital code, digital product, or other taxable service, Maryland’s 6% sales tax rate will apply.
The bill also specifies that should a buyer of any of the services above provide the seller with a certificate at the time of purchase indicating that the service will have multiple points of use, the responsibility for collecting and remitting the tax will shift from the seller to the buyer.
The budget includes two definitions of multiple points of use. First are services the buyer can use in more than one jurisdiction at the same time. The buyer should consistently use any reasonable apportionment method based on its books and records at the time of the sale that accurately reflects the service’s primary use location in the state.
The second multi-use prong encompasses services resold in their original form to another member of the buyer’s affiliated group or pass-through entity. In those transactions, the reseller must either:
- Assume or absorb the tax apportioned to the state that is due from the entity purchasing the resold service and pay it on that entity’s behalf; or
- Be liable for the tax if the related entity does not pay it.
Individual Changes
The budget bill creates new income tax brackets for high-income earners. The tax rate for individuals earning between $500,001 and $1 million increases from 5.75% to 6.25%, and the rate for those earning more than $1 million increases from 5.75% to 6.5%. The maximum local piggyback income tax rate will increase from 3.2% to 3.3%.
Capital gains of individuals with adjusted gross incomes over $350,000 that include such gains will be subject to a 2% surtax. The budget carves out several types of assets, with the most notable being property used in a trade or business whose cost is deductible under IRC Section 179.
The bill also increases the standard deduction, but not to the levels hoped for by Gov. Wes Moore, who wanted to double the allowed amount. Lawmakers rejected Moore’s proposed elimination of itemized deductions, instead opting to reduce them by 7.5% of the excess of individual taxable income over $200,000.
Those changes take effect July 1, 2025, and apply to tax years beginning after December 31, 2024.
Miscellaneous
The bill increases sales tax on cannabis from 9% to 12%. That results in cannabis being taxed at double the normal sales rate of 6% and even more highly than alcohol, which is taxed at 9%.
The fiscal 2026 budget includes several other tax changes, such as:
- Making some vending machine sales subject to the 6% sales tax rate;
- Upping the taxation of sports betting operations from 15% to 20%;
- Increasing the vehicle excise tax from 6% to 6.5%; and
- Imposing a 3.5% excise tax on car rentals.
Failed Provisions
Moore’s proposals to reduce the corporate rate from 8.25% to 7.99% and implement combined reporting failed. The legislature also rejected the governor’s plan to repeal the state’s inheritance tax.
BDO Insight
- The effective date of the new 3% tax on information technology services is July 1, 2025. Businesses that consume or sell those data or information technology services should consult with a tax advisor without delay to see if they are subject to the new taxes and how to comply.
- The capital gains carveout for Section 179 property is problematic. In theory, two taxpayers holding the same asset could be treated differently based on their taxable incomes. Further, because the carveout’s mechanics are unclear, it will likely be difficult for taxpayers and advisers to interpret and apply the carveout.
- The governor has 90 days to sign the budget bill and is expected to do so, given that many of the final provisions were part of his administration’s original tax plan.
- The Comptroller’s Office is expected to issue guidance on the tech tax and the individual income tax changes.
Please visit BDO’s State & Local Tax Services; Income, Franchise, and Gross Receipts Tax; or Sales and Use Tax pages for more information on how BDO can help.