On February 25, 2025, the Maryland House of Delegates and Maryland Senate introduced HB 1554 and SB 1045, respectively, which would amend the definitions of "taxable price" and "taxable service" for sales and use tax purposes to include certain transactions in which both the service provider and buyer are both business entities. If enacted, any business entity that meets the definition of a "vendor," pursuant to COMAR 03.06.01.33, that sells a listed service to another business entity would be required to collect and remit sales tax beginning July 1, 2025.

The proposed legislation would make taxable several categories of service transactions, based on the description provided in the relevant North American Industry Classification System (NAICS) code, that historically have not been subject to tax. Specific services the proposed legislation would tax include:

• Financial planning or tax preparation services (NAICS 5239 or 5412)
• Accounting, bookkeeping, billing, or payroll services (NAICS 5412)
• Consulting services (NAICS 5416)
• Lobbying, public relations, or marketing services (NAICS 5418)
• Office support services (NAICS 561110, 5614, or 561910)
• Landscaping and nonresidential building or property maintenance services (NAICS 561210, 5616, or 5617)
• Permanent or temporary employee or contractor placement services (NAICS 5613)
• System software or application software publishing services (NAICS 5415)
• Experimental development services (NAICS 5417)
• Photography, design, or printing services (NAICS 541420, 541430, or 541490)
• Heavy truck or bus repair services (NAICS 8111)
• Repair services (NAICS 8112 or 8113)
• Appraisal services (NAICS 541990)
• Sports or performing arts advertising services
• Valet or parking services (NAICS 812930)

The proposed legislation would tax the listed service transactions at a 2.5% rate, rather than the general 6% Maryland sales tax rate. However, if a different rate could be imposed, the higher of the two rates would apply.

Implications

Of particular interest is the legislation's focus on a broad range of financial services. Although NAICS code 5231, which covers "investment banking, securities dealing, securities brokerage, commodity contracts dealing, or commodity contracts brokering," is not listed as taxable and would not be subject to tax under the proposed legislation, asset management and other financial services may become taxable, as such services fall under NAICS 5239. Specifically, NAICS 5239 sector services subject to tax would include:

• Asset management (under 523940 — Portfolio Management and Investment Advice), which is defined as being primarily engaged in managing the portfolio assets (i.e., funds) of others on a fee or commission basis, and/or providing customized investment advice to clients on a fee basis. Establishments providing portfolio management have the authority to make investment decisions, and derive fees based on the size and/or overall performance of the portfolio. Establishments providing investment advice provide financial planning advice and investment counseling to meet the goals and needs of specific clients, but do not have the authority to execute trades.
• Mortgage dealers (under 523910 - Miscellaneous Intermediation), defined as establishments primarily engaged in acting as principals (except investment bankers, securities dealers, and commodity contracts dealers) in buying or selling financial contracts generally on a spread basis. Principals are investors that buy or sell for their own account.
• Trust, fiduciary, and custody activities (under 523991), defined as providing trust, fiduciary, and custody services to others, as instructed, on a fee or contract basis, such as bank trust offices and escrow agencies (except real estate).
• Miscellaneous financial investment activities (under 52399).

In short, the legislation would have a potentially significant trickle-down effect on the cost of services provided to consumers by increasing the overall cost of business inputs to service providers, most notably with respect to accounting, consulting, and office support services. As proposed, the legislation would apply to transactions between both related and unrelated parties, potentially increasing operating costs for taxpayers with Maryland operations supported by intercompany services.

The legislation currently is in the House Ways and Means Committee and the Senate Budget and Taxation Committee, and is scheduled for hearings in each committee on March 12.

EY will be closely monitoring this development and will issue additional Alerts as warranted.