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March 10, 2021

Digital products subject to Maryland sales and use tax include electronically delivered canned software and software as a service

The Maryland Comptroller of Treasury (Comptroller) issued guidance1 on the application of the recent statutory expansion of the state's sales and use tax to the sale or use of digital products in Maryland. The Comptroller has said taxable digital products include sales of canned or commercial off-the-shelf (COTS) software that are electronically delivered and software as a service (SaaS).

Tax applies to sales or use of a digital product in Maryland beginning March 14, 2021.


On February 12, 2021, the Maryland legislature overrode Maryland Governor Larry Hogan's veto of HB 932. By overriding the veto, that bill became effective, thus extending the state's existing 6% sales and use tax to the sale of digital products.

"Digital products" as defined in HB 932 includes digital code; streaming; music; ring tones; electronic and audio books; electronically transferred movies, music videos, news, entertainment programs, live events, video or electronic games; e-mailed audio and video greeting cards, prerecorded or live music or performances and speeches; and online newspapers and magazines.

Digital code is defined in HB 932 as code that (1) may be obtained by any means, including in tangible form or through e-mail, and (2) provides a buyer with a right to obtain one or more digital products. The Comptroller said additional examples of "by any means" include electronically through computer-mediated communications such as text or messaging, and tangible form such as a card, an imprint on a product or other storage product. The new law further states that digital code does not include gift certificates or gift cards that may be redeemed for an item other than a digital product.

The Comptroller's guidance appears intended to clarify which digital goods and services will be taxed as digital products, what sales tax exclusions and exemptions may apply, how the collection of tax on sales of digital products will apply to marketplace facilitators and remote retailers, and how to source sales of digital products and digital codes.

Taxable digital products

The guidance provides a non-exclusive list of digital products subject to sales and use tax if obtained or delivered electronically. In addition to the items mentioned previously, taxable digital products include:

  • Sales, subscriptions or licenses to use a software application or to access content online
  • Customer lists, mailing lists, medical records and similar products
  • Design files, models and templates (e.g., three-dimensional (3D) design files, 3D models, computerized numerical control (CNC) templates and virtual/alternate reality templates)
  • Access to a chat room, discussion, weblog or any other venue that permits users to communicate electronically in real time
  • Access to or use of virtual items, such as skins, renders and in-app purchases, purchased for use in a video or online game

Application of tax to various sales

The Comptroller guidance addresses the application of sales and use tax to various sales transactions; most notably software. As of March 14, 2021, sales of canned or COTS software that are electronically delivered, as well as sales of SaaS, are taxable sales of digital products. Custom software and computer programs for resale, however, are exempt from tax.

Specific guidance is also provided on the following:

  • Sales of digital products by advertising agencies when the transaction is for the production and electronic delivery of the product
  • Charges for viewing or attending continuing education classes, seminars or conferences that are electronically delivered
  • Sales of textbooks (delivered electronically or in tangible form)
  • Sales of various entertainment such as pre-recorded audio and video content, live music performances, streaming audio and video services, cable services, and satellite television and radio services
  • Sales of newspapers, photography and video

Sales of non-taxable services performed electronically are not subject to sales and use tax unless the service results in a digital product. If the sale of a non-taxable service or non-taxable tangible personal property is bundled with the sale of a taxable digital product, the entire charge for the bundled transaction is subject to tax. Sales and use tax do not apply to charges for nontaxable personal, professional or insurance services that involve a sale of a digital product as an inconsequential element for which a separate charge is not made.

Exemptions and exclusions

According to the Comptroller's guidance, sales and use tax only applies to sales or use of a digital product by an end user. Thus, non-end users may claim a resale exclusion on the purchase of a digital product if it was purchased with the intent of:

  • Reselling the digital product in the same form as it received
  • Incorporating the digital product into another digital product intended for resale
  • Transferring the digital product to a buyer in the form of a taxable service


  • Incorporating the digital product into a physical product

Another Maryland statute (Md. Tax-Gen. Section 11-221(c)) exempts from sales tax the sale of tangible personal property or taxable services acquired by a buyer that pays tax on the sale to another state before entering Maryland. The Comptroller explained that HB 932 did not expand this exemption to include sales of digital products. Consequently, buyers paying another state tax on the sale or gross receipts from the sale of digital products before entering Maryland must also pay use tax for the use of digital products in Maryland.

HB 932 did not expand the definition of "production activity" to include digital products. Thus, purchases of tangible personal property used to create digital products and digital code, as well as purchases of a digital product to create tangible personal property, do not qualify for Maryland's production activity exemption. Sales and use tax, however, will not apply to sales of digital products used in a production activity of tangible personal property that is being produced for sale at retail.

The Comptroller further stated that sales and use tax does not apply to sales of:

  • A series of images stored on video tape or in other optical or digital forms if the images are intended for television viewers located outside of Maryland
  • Electronic signals to a cable or other nonbroadcast television network, if the images are intended for television viewers located outside of Maryland
  • Tangible personal property or digital products for use or consumption in research and development

Marketplace facilitators and remote sellers

The guidance also clarifies that marketplace facilitators must collect and remit tax on sales of digital goods made through their marketplace. Before this clarification, the collection requirement was limited to transactions involving sales of tangible personal property.

According to the guidance, remote sellers must consider the amount or number of sales of digital products and digital code made to Maryland locations when determining whether they meet Maryland's economic nexus thresholds for sales and use tax (i.e., more than $100,000 in gross revenues or 200 or more separate transactions). Before this clarification, the collection requirement was limited to transactions involving tangible personal property or taxable services.


Retail sales of digital code or digital projects are presumed to be made in the state in which the "customer tax address" is located. The guidance outlines how to determine a "customer tax address," establishing a cascade of conditions for determining whether the retail sale is located in Maryland.


Taxpayers selling taxable digital products to a "customer tax address" in Maryland need to immediately review and update their systems and processes so they can begin collecting tax on Maryland sales starting March 14, 2021.

Enactment of this provision aligns Maryland sales tax law with those in more than 30 other state-level jurisdictions, as well as some local jurisdictions (including Chicago), that impose their sales and use tax (or other type of transactions-based tax) on sales of digital products.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Karl Nicolas (
   • Joe Imbarlina (


1 Md. Comp. of Treas., Business Tax Tip #29 "Sales of Digital Products and Digital Code" (March 9, 2021).