Expansion of the Maryland Retail Sales and Use Tax Regime

On Feb. 12, 2021, Maryland’s General Assembly passed the 21st-Century Economy Fairness Act (the Sales Act). A natural evolution in sales tax legislation following South Dakota v. Wayfair, the Sales Act mandates taxation of digital product retail sales, with an expected $250 million revenue benefit for the state in its first year.

The Sales Act establishes the term “digital product,” which generally includes any product distributed electronically to consumers; specific examples of digital products included in the Sales Act are:

  • E-books
  • Audio files
  • Video files
  • Ringtones
  • Newspapers

Under the Sales Act, Maryland also taxes sales of digital codes or codes that provide the buyer with the ability to purchase digital products. Similarly, sales of digital products by way of subscription or streaming are taxable via the Sales Act.  It also expands the state’s definition of taxable services to include a digital product by special order.

While greatly expanding the state’s definition of taxable sales, this hallmark legislation does not alter Maryland’s other sales tax policies, including sales nexus thresholds. Out-of-state vendors selling digital products into Maryland should reexamine their activities to identify any sales tax exposure resulting from this legislation.

With passage of the Sales Act, Maryland’s General Assembly also passed the Nation’s first Digital Advertising Gross Revenues Tax (the Receipts Act).

Maryland’s Receipts Act establishes a new gross receipts tax on businesses with revenues derived in Maryland from digital advertising services, which is broadly defined as advertisement services on a digital interface, including banner advertising, search engine advertising, interstitial advertising and other comparable ad services. Digital interface means any type of software, including a website, part of a website or application accessed by a user. The new tax rate-imposed ranges from 2.5 percent up to 10 percent, which is applied based on certain thresholds of global annual gross revenues, beginning at $100 million.

The Receipts Act specifies that the part of the annual gross revenues of a business derived from digital advertising services in Maryland is determined by an apportionment fraction: the numerator of which is the annual gross revenues from digital advertising services in Maryland; and the denominator of which is the annual gross revenues derived from digital advertising services in the United States.

The Comptroller is required to adopt regulations that determine the state from which revenues from digital advertising services are derived. Moreover, the Comptroller has broad enforcement mechanisms for noncompliance, including assessing penalties up to 25 percent of the tax due. It includes requiring annual returns (due April 15) to be filed by all businesses with annual gross revenues derived from digital advertising services in Maryland of at least $1 million. A business may be charged a fine up to $5,000 for failure to file the return.

Companies with Maryland ad revenue should evaluate their tax exposure and filing requirements. Besides establishing the tax on advertising, the Receipts Act also increases existing taxes on tobacco products, including vape pens. The new digital advertising gross receipts tax applies to tax periods beginning after Dec. 31, 2020.

Maryland Governor Hogan tried to avoid passage of both acts by veto, noting that these taxes may unduly burden the state’s economy amid the pandemic. With their vote to override Hogan’s veto, Maryland legislators earmarked revenues from both acts to specifically aid in the state’s emergency response to the pandemic. The acts originally stated that they were retroactively effective as of July 1, 2020, but since they were enacted over the Governor’s veto, the Maryland Constitution includes special procedures that result in their effective date being March 14, 2021. Therefore, the digital advertising tax should be retroactively applied by the Comptroller to the beginning of 2021.

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