On July 1, 2022, the Comptroller of the Treasury of Maryland revised its Business Tax Tip #29, to acknowledge the exclusion of certain business purchases of digital products. In addition, the revised guidance clarifies the taxation of data processing, information, web hosting and digital advertising services. This is the third round of reviews by Comptroller of Tax Board No. 29 since Maryland began taxing digital goods on March 14, 2021.
Newly Enacted Changes to Maryland’s New Digital Product Taxation
- A product having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities where the buyer owns a copyright or other intellectual property interest in the product, in whole or in part, if the buyer uses the product solely for commercial purposes, including advertising or other marketing activities; Where
- Computer software or software as a service purchased or licensed solely for commercial use in a business computer system, including operating programs or application software for the exclusive use of the business software system , which is hosted or maintained by Buyer or on a cloud server, whether hosted by Buyer, Software Provider or a third party.
These two categories of non-taxable commercial purchases include purchases of: (i) certain digital content (such as images, artwork, video, or music) that a business uses in its advertising; and (ii) enterprise resource planning (ERP) software.
Although not defined by the new law, the Comptroller explains in Business Tax Tip #29 that a “business computer system” includes the following:
- A set of software packages working together as an interconnected network;
- A purchase or license of computer software for concurrent use on multiple computers that is hosted or maintained on a corporate server, cloud server, or end users’ computers; Where
- Software designed to run a computer system, operating program or application software.
Thus, even if pre-written computer software is purchased for commercial purposes, it will be taxable if it cannot be used by multiple users and does not work with other software or computers. For example, tax preparation software used by a sole proprietorship in their business is not excluded business software because it is not purchased or licensed “for simultaneous use on multiple computers.” The monitor warns that a seller and a buyer must keep documents supporting the transaction tax-free. It is important to note that the sale of software or software as a service to an individual for non-commercial purposes is still subject to Maryland sales and use tax, unless another exclusion or exemption applies. ‘applied.
The General Assembly wanted the amendments to be of a clarifying nature, as evidenced by the budget and policy briefs from the Department of Legislative Services to SB 723 and HB 791: “the amount of revenue decline [from the amendments] should not be significant. Further, citing an earlier version of Business Tax Tip #29, the Department of Legislative Services also explains in these notes that “information posted on the Comptroller’s website indicates that many, if not all, of these transactions [described in the amendments] are exempt from sales and use tax under applicable law.
Eversheds Sutherland Viewing: In addition to these changes to Maryland’s digital product taxation, there are other exclusions or exemptions to consider. First, even though computer software is not considered non-taxable “business software,” it may still be exempt under Md. Code Ann., Tax-Gen. § 11-219(b) as customized, configured or modified software. Second, Maryland excludes or exempts certain digital product “inputs” where the seller does not own an intellectual property interest. Specifically, the Digital Goods Tax does not apply to: (i) sales to “non-end users”, i.e., anyone who “receives a digital code or digital product for broadcast subsequent commercial retransmission, transmission, retransmission, license, license, distribution, redistribution, or exhibition of the Digital Product” and (ii) sales to purchasers who will resell a Digital Product, transfer a Digital Product under a digital service or integrate a digital product into a physical product or another digital product. product for resale.
The Comptroller also indicates in revised Business Tax Tip #29 that a variety of other services are not subject to Maryland sales and use tax, whether sold to a taxpayer for personal or business use. :
- Cloud storage services and data transfer fees;
- search engine optimization services;
- video conferencing software platforms;
- web hosting services;
- Website design and development;
- video conferencing software platforms; and
- Data and information processing services.
To qualify as a data or information processing service, the provider must be contractually obligated to sort and process the data into a single report for a particular customer at the request of the customer. In contrast, the sale of a static, non-personalized customer list, mailing list, or medical report for a specific purchaser is subject to sales and use tax if delivered or obtained by electronic way.
Under the law, the General Assembly imposed a sales and use tax on the sale of chat rooms, blogs, and similar products as “digital goods.” In connection with these elements, the Monitor has added the following explanatory examples in its latest guidelines:
- Subscriptions to weekly newsletters containing articles on tax and accounting issues are taxable;
- Monthly subscriptions to a legal research company’s product that allows subscribers to research federal and state laws, regulations, and court cases are nontaxable services. But a separate fee for allowing subscribers to download PDFs of treatises, textbooks, journals and articles that are not included in the research service subscription is subject to the tax; and
- A premium subscription for additional content and functionality from a website that allows users to post a profile of themselves and interact with other users in real time is subject to tax.
Non-taxable digital advertising services
In addition to explaining whether a variety of services are subject to sales and use tax, the Monitor concludes that several digital advertising services are not “digital products” and, therefore, are not subject to the Maryland sales and use tax. The following digital advertising services are not subject to sales and use tax, but – according to the Controller – “may be subject to other Maryland taxes”:
- Banners and display advertisements;
- Interstitial advertising;
- Paid search advertising;
- Search engine optimization; and
- Pay-per-click advertising.
Eversheds Sutherland Viewing: The list of non-taxable digital advertising services in Business Tax Tip #29 closely mirrors the listed services subject to Maryland’s separately imposed digital advertising tax, which is being challenged in state and federal courts .
The Eversheds Sutherland SALT team will continue to monitor the sales and use of Maryland’s Digital Product Tax, as well as any other Tax Tip #29 revisions.