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April 19, 2021

Maryland legislature approves amendments to new sales and use tax law on digital codes and digital products

The Maryland legislature has passed and sent to Governor Larry Hogan SB 787, which would amend the state's sales and use tax provisions on the taxation of digital codes and digital goods. The changes would clarify the digital codes and digital goods to which sales and use tax does and does not apply, and would require marketplace facilitators to collect and remit sales and use tax on certain sales of digital codes and digital goods.


On February 12, 2021, the Maryland legislature overrode Maryland Governor Larry Hogan's veto of HB 932 (2020 Md. Laws c.38), which the legislature initially approved in 2020. By overriding the veto, that bill became effective shortly thereafter, extending the state's existing 6% sales and use tax to the sale or use of digital products in Maryland beginning March 14, 2021. "Digital products," as defined in HB 932 (and now codified at Md. Code Tax-Gen. Section 11-101(c-4)), 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; emailed audio and video greeting cards, prerecorded or live music, performances and speeches; and online newspapers and magazines.

On March 9, 2021, the Maryland Comptroller of Treasury (MD Comptroller) issued guidance1 on applying the state's sales and use tax to the sale or use of digital products in Maryland (see Tax Alert 2021-0530). The MD Comptroller's guidance clarified 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.

SB 787 would (1) modify certain terms governing the application of sales and use tax to digital codes and digital products, (2) require certain marketplace facilitators to collect tax on certain sales of digital codes and digital products, (3) exempt certain sales of digital code and digital products from tax, and (4) clarify certain sales and use tax administrative provisions governing certain sales of digital codes and digital products. Further, Section 3 of SB 787 also expresses the intent of the General Assembly that the changes in the bill related to digital code and digital products apply to the date HB 932 was enacted.

Definitional changes

SB 787, Section 12 would modify the various definitions that reference "digital products" to also reference "digital code." The definition of "digital code" would be modified to mean "a number, symbol, alphanumeric sequence, barcode, or similar code" that (1) may be obtained by any means, including in tangible form (e.g., a card) or through email, and (2) provides a buyer with a right to obtain one or more digital products (italics indicates new language).

SB 787, Section 13 would also add a new clause specifying that the following are not "digital products":

  • Professional services obtained electronically or delivered through the use of certain technology
  • Prerecorded or live instruction by a school
  • Instruction in a skill or profession in a buyer's current or prospective business, occupation or trade if it is not prerecorded and features an interactive element between the buyer and the instructor or other buyers
  • Seminars, discussions or similar events hosted by a nonprofit organization or business association if it is not prerecorded and features an interactive element between the buyer and host or other buyers

The definition of "marketplace facilitator"4 would be expanded to include a person that facilitates retail sales by a marketplace seller by listing or advertising for sale in a marketplace tangible personal property, digital codes or digital goods (italics indicates new language).

Computer software

The MD Comptroller's guidance stated that sales of digital products (which include sales of canned or commercial off-the-shelf (COTS) software that are electronically delivered) and software as a service (SaaS) are taxable. On the other hand, the guidance expressly stated that custom software and computer programs for resale are exempt from tax.

SB 7875 would make clear that sales and use tax does not apply to custom computer software, regardless of the method transferred or accessed, or a service relating to custom computer software that:

  • Would otherwise be taxable
  • Is to be used by a specific person
  • Is created for that person or contains standard or proprietary routines requiring significant creative input to customize, configure or modify the procedures and programs that are necessary to perform the functions required for the software to operate as intended
  • Does not constitute a program, procedure or documentation that is mass produced and sold to the general public or persons engaged in a trade, profession or industry, except if the software is created for that person

Exemptions and exclusions

Generally, Maryland's sales and use tax applies to a retail sale in the state and a use, in Maryland, of tangible personal property, a digital code, a digital product or a taxable service.

SB 787 would exempt from sales and use tax digital codes or digital products that are:

  • Used directly in connection with a film production activity by a certified film producer or production company
  • Sold to an in-state nonprofit parent-teacher association if the purchase is contributed to the school
  • To be used only in television broadcasting by a television station that is licensed by the FCC to specifically broadcast to a location outside the state (applies to digital products)
  • To be used physically in, on, or by conveyance in an aircraft, motor vehicle, railroad rolling stock, or vessel that is used principally to cross state lines in interstate or foreign commerce (applies to digital products)
  • Used directly and predominantly in a production activity (during any stage of the production operation), provided it is not installed in such a manner that it becomes real property
  • Used for less than 30 days in the state by a nonresident who acquired the digital code or digital product before entering the state and used it for personal enjoyment or in a presentation (or in conjunction with a presentation of an exhibit, show, sporting event or other public performance or display)
  • Bought outside Maryland, intended solely for use in another state, and stored in Maryland pending shipment to another state
  • For use or consumption in research and development
  • Sold to the state or one of its political subdivisions (this exemption does not apply to otherwise taxable sales to a contractor to be used under a contract with Maryland or one of its political subdivisions)

Sales and use tax would not apply to the following transactions involving digital code or digital products:

  • Casual and isolated sales of items if the sale price is less than $1,000 and not made through an auctioneer or a dealer
  • Distribution by a corporation or joint-stock company to its stockholders as a liquidating distribution, a partnership to a partner, or a limited liability company to a member
  • A transfer under an IRC Section 368(a) reorganization
  • A transfer to a corporation or joint-stock company on its organization principally in consideration for the issuance of its stock
  • A transfer to a partnership/limited liability company (LLC) as a capital contribution or in consideration for a partnership/LLC interest

Md. Code 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. SB 787 would expand this exemption to apply to sales of digital code and digital products as well.

Other changes

SB 787 would extend to purchases of digital code or digital products the depreciation allowance for goods first used outside Maryland that are subsequently brought into Maryland for use. The depreciation allowance is 10% of the taxable price paid for the digital code or digital products for each full year that follows the date of purchase.

SB 787 would amend various vendor-related provisions (e.g., resale certificates, collection and remittance) that reference sales of tangible personal property and services to add references to digital code and digital products.

SB 787 would modify Maryland's "engaged in business" provisions for out-of-state vendors and retail vendors to include references to digital code and digital products.


SB 787 provides some clarity on the application of Maryland's sales and use tax to digital code and digital products. Provisions of SB 787 were introduced and approved after the MD Comptroller issued guidance (Business Tax Tip #29 "Sales of Digital Products and Digital Code") on this issue. Thus, parts of the MD Comptroller's guidance, until revised to reflect the changes in SB 787, may not align with the law if SB 787 is enacted. The MD Comptroller is widely expected to revise its Tax Tips #29 guidance if Governor Hogan signs the bill into law.

Affected taxpayers will also need to update their systems and processes to reflect these changes if enacted.


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).

2 Amending Md. Code Tax-Gen. Section 11-101(c-3) (defining "digital code").

3 Amending Md. Code Tax-Gen. Section 11-101(c-4) (defining "digital product") to add new clause (3).

4 Amending Md. Code Tax-Gen. Section 11-101(c-6).

5 Amending Md. Code Tax-Gen. Section 11-217(b).