Maryland had previously enacted two important - and troubling - sets of tax changes: a new tax on digital advertising and a substantial expansion of its sales tax to digital products and services. As a result of several significant problems with both tax changes, the Maryland legislature just passed Senate Bill 787.

• S.B. 787 amends Maryland’s Digital Advertising Gross Revenues Tax by: (1) delaying the start date to January 1, 2022; (2) exempting broadcast and news media entities’ digital advertisement services, and (3) prohibiting the pass-through of the tax via a separate charge.
• S.B. 787 also amends Maryland’s sales and use tax expansion on digital products by: (1) exempting a limited number of digital services, including live-streamed school instruction; (2) expanding the custom computer software exemption; and (3) making various technical corrections.

Maryland Governor Larry Hogan is expected to neither sign nor veto the bill, which would allow S.B. 787 to become law in 30 days.

Digital advertising tax

On February 12, 2021, the Maryland General Assembly overrode Governor Hogan’s veto of H.B. 732 and enacted the Maryland Digital Advertising Gross Revenues Tax. The new tax’s rate varies based on a taxpayer’s global annual revenues, ranging from 2.5% to 10% of the annual gross revenues derived from digital advertising services in Maryland. The tax took effect on March 14, 2021 and applied to tax years beginning on or after January 1, 2021.

Digital advertising tax – S.B. 787 amendments

S.B. 787 makes three changes to the digital advertising tax. First, the effective date of the digital advertising tax is delayed to January 1, 2022.

Second, Maryland enacted a new exemption that benefits local broadcasters. The tax will not apply to “advertisement services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity.” (Emphasis added). A “broadcast entity” is “an entity that is primarily engaged in the business of operating a broadcast television or radio station.” A “news media entity” is “an entity engaged primarily in the business of newsgathering, reporting, or publishing articles or commentary about news, current events, culture or other matters of public interest.” However, a “news media entity” does not include an entity that is primarily an aggregator or republisher of third-party content.” The bill does not explain several key features of these exemptions, such as:

• When is a digital interface operated on behalf of a broadcast or news media entity?
• How does one determine when an entity is primarily engaged in a broadcast or news business?
• How does one determine when an entity is primarily an aggregator or republisher?

Third, Maryland will prohibit taxpayers from directly passing on the tax to a customer “by means of a separate fee, surcharge, or line-item.” However, taxpayers are not prohibited from passing the tax on to Maryland customers indirectly, such as by increasing the price of the advertising services to account for the digital advertising tax.

Digital products sales tax

On February 12, 2021, the Maryland General Assembly also overrode Governor Hogan’s veto of H.B. 932 and substantially expanded the sales and use tax to digital products and digital codes, effective March 14, 2021. The bill defined “digital product” as “a product that is obtained electronically by the buyer or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.” The term specifically includes electronically transferred music files, video files, e-books, newspapers and magazines, and video games.

The Maryland Comptroller of the Treasury then issued Business Tax Tip #29, which interpreted the new digital products sales tax provisions to include a bevy of digital goods and services. Many of these goods and services were specifically enumerated in H.B. 932, but many were not. The list of taxable items included in Tax Tip # 29 includes:

• Digital downloads or streams of motion pictures, music videos, news and entertainment programs, live events, sporting events, tutorials, etc.;
• Sales, subscriptions, or licenses to use a software application;
• Access to chat rooms, discussions, weblogs, or any other venue that permits users to communicate electronically in real time;
• Online classes, instructions, or similar products;
• Access to or use of video or online games;
• Prerecorded or live speeches, including commentaries, dissertations, and lectures; and
• Software as a Service.

Further, the Comptroller also noted that various exemptions do not apply to digital products because H.B. 932 failed to update the exemptions accordingly.

Digital products sales tax – S.B. 787 amendments

In response to the Comptroller’s guidance and outreach from the business community, S.B. 787 provides a limited set of exclusions from the sales tax and made other changes, including:

1. Clarifying that the tax applies to a subscription to, access to, receipt of, or streaming of a digital product;
2. Exempting certain school instruction, continuing business education, nonprofit events, and professional services obtained electronically;
3. Expanding the exemption applicable to certain custom software and related services to apply regardless of the method transferred or accessed and to situations where the software is customized, configured, or modified “to perform the functions required for the software to operate as intended”;
4. Adding digital codes to the digital product provisions throughout; and
5. Applying limited exemptions to digital products, such as for casual and isolated sales, their use in production activities, or temporary storage in the state.

The General Assembly left in place some of the more concerning sales taxability of digital products determinations. S.B. 787 did not alter the Comptroller’s interpretation of the sales tax on most computer software downloads and SaaS. However, during debate, legislators stated that the amendments were intended to exempt “enterprise software” under the custom software exemption in Md. Code Ann., Tax-General § 11-219(b).

Next steps

Governor Hogan has 30 days from presentment to veto the legislation, sign it into law, or allow the legislation to become law without his signature. He is expected to neither veto nor sign it, which will have the effect of the amendment becoming law in 30 days. However, the amendment will be retroactively applied to March 14, 2021 (the original effective date of the digital advertising tax and the sales tax expansion).

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