Modernizing Maryland’s Tax Landscape: The 3% IT/Software Services Tax and What It Means for Your Business
On May 20, 2025, Maryland Governor Wes Moore signed the Budget Reconciliation and Financing Act (BRFA) of 2025, closing a $3.3 billion budget gap while significantly expanding the state’s sales and use tax base. Among its most impactful provisions is the creation of a 3% sales and use tax on specified information technology (IT) and software publishing services, effective July 1, 2025.[1]
This measure marks Maryland’s push to modernize its tax code to reflect today’s digital economy. Unlike earlier proposals for a broad 2.5% business-to-business services tax (which did not pass), the enacted law is narrower in scope and applies only to certain services classified under specific NAICS codes.
Why the IT/Software Services Tax?
The shift toward a digital economy has outpaced traditional tax structures. Cloud computing, software-as-a-service (SaaS), and systems consulting are now cornerstones of how businesses operate, yet have historically escaped state taxation. Maryland’s 3% IT/software services tax aims to rectify this imbalance, capture lost revenue, and fund essential programs, particularly in education and transportation.
What’s Taxable at 3%
The 3% IT/software services tax applies to services that match the activity descriptions in the following NAICS categories:
- Data processing, hosting, and related services (NAICS 518) – including cloud computing, data storage, and web hosting
- Other information services (NAICS 519) – such as certain information and search portal services
- Computer systems design and related services (NAICS 5415) – including software development, systems integration, IT consulting, and many cybersecurity services
- Software publishing services (NAICS 5132) – for both system and application software
It is important to note that a business that has chosen a NAICS classification other than 518, 519, 5415, or 5132 for income tax or other purposes, but which sells a service described by those codes, is still required to collect and remit sales and use tax on the sale. Additionally, there is no exemption for sales made to affiliated company members. Lastly, online advertising and digital marketing (generally NAICS 5418) are not included in the 3% base. Maryland’s separate digital advertising gross revenues tax remains distinct.
SaaS and the Rate Distinction
SaaS meets the definitions of both a digital product and a software publishing service. Commercial use of SaaS (solely used in an enterprise computer system) is taxed as a service at 3%. Individual-use SaaS (not used for commercial purposes in an enterprise computer system) is treated as a digital product and taxed at 6%. If SaaS could fall into both categories, Maryland applies the higher applicable rate. Additionally, the exemption for customized software or SaaS is repealed effective July 1, 2025.
Actionable Steps to Ensure Compliance With the IT/Software Services Tax
- Conduct a Taxability Assessment
- Review your products and services to determine which fall under the taxable NAICS activities.
- Use Maryland Comptroller’s guidance to evaluate borderline services. Technical Bulletin No. 56 and Code of Maryland Regulations 03.06.01.48 have lists of data or information technology services and software publishing services subject to the 3% sales and use tax.
- Register With the Maryland Comptroller
- If your business provides taxable IT/software services to Maryland customers, register for a sales and use tax license.
- Out-of-state providers with economic nexus ($100,000 in sales or 200 transactions) must also comply.
- Update Invoicing and Point-of-Sale Systems
- Ensure all relevant services are taxed at 3%, while digital products remain at 6%.
- Itemize the tax clearly on customer invoices.
- Review and Renegotiate Contracts
- Pre–July 1, 2025, contracts remain exempt, but auto-renewals and change orders after July 1 are taxable.
- Determine who bears the tax burden, you or the client, and adjust terms if necessary.
- Educate Staff and Clients
- Train sales, finance, and legal teams to understand the tax’s implications.
- Proactively communicate with clients about the changes to maintain transparency.
- Maintain Detailed Records
- Keep meticulous records of all transactions involving taxable IT/software services.
- Be prepared for potential audits by the Maryland Comptroller’s Office.
- Use Multiple Points of Use (MPU) Certificates When Applicable
- If services are used across multiple states, buyers can issue an MPU certificate to apportion tax and self-assess accordingly.
- Seek Professional Tax Guidance
- Consult with a tax advisor familiar with Maryland’s new framework.
- Stay informed about additional guidance or clarifications from the Comptroller.
Legal Landscape
As of October 2025, no major lawsuits have been filed challenging Maryland's 3% IT/Software Services Tax. However, litigation remains ongoing against Maryland's Digital Advertising Gross Revenues Tax, which is a separate law, citing violations of the Internet Tax Freedom Act, Commerce Clause, and First Amendment.
Courts have already struck down parts of that law's "pass-through" provision as unconstitutional[2]. These outcomes could influence how Maryland defends future digital-service tax expansions, but no such challenges currently apply to the 3% IT/software tax.
Final Thoughts
The BRFA of 2025 marks a decisive shift in how Maryland approaches taxation in the digital age. While the 3% IT/software services tax may pose short-term administrative and financial challenges, it also presents an opportunity for businesses to future-proof their operations and establish robust compliance practices.
Being proactive rather than reactive will allow Maryland-based and out-of-state businesses alike to navigate this transition effectively. In a time of fiscal realignment, compliance is not just about avoiding penalties, instead it’s about staying competitive, transparent, and resilient.
[1] “Technical Bulletin No. 56 I Sales and Use Tax on Data or Information Technology Services and Software
Publishing Services: Questions and Answers,” Comptroller of Maryland, revised June 30,2025.
[2]Chamber of Commerce et al. v. Lierman, Case No. 24-1727 (4th Cir. Aug. 15, 2025)
