The effects of Maryland’s 21st Century Economy Fairness Act will soon be felt by vendors and consumers of “digital products” in Maryland. This new law, effective March 14, 2021, is catching many by surprise as the bill was vetoed by Governor Hogan in May 2020. Maryland’s legislature overrode the governor in February of this year. This law amends Maryland’s sales and use tax statute by making certain sales of “digital product” subject to taxation.
According to the law, “digital product” is defined 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.” It includes:
(i) a work that results from the fixation of a series of sounds that are transferred electronically, including prerecorded or live music or performances, readings of books or other written materials, and speeches; and audio greeting cards sent by e-mail;
(ii) a digitized sound file, such as a ring tone, that is downloaded onto a device and may be used to alert the user of the device with respect to a communication;
(iii) a series of related images that, when shown in succession, impart an impression of motion, together with any accompanying sounds that are transferred electronically, including motion pictures, musical videos, news and entertainment programs, live events, video greeting cards sent by e-mail, and video or electronic games;
(iv) a book, generally known as an “e-book”, that is transferred electronically; and
(v) a newspaper, magazine, periodical, chat room discussion, weblog, or any other similar product that is transferred electronically.
Examples of “digital products” include sales, subscriptions or licenses to use a software application (commonly referred to as SaaS) and sales of streaming audio and video. Numerous other examples are provided by the Maryland Comptroller in its Business Tax Tip #29 available at https://www.marylandtaxes.gov/forms/Business_Tax_Tips/bustip29.pdf.
Whether a retail sale of a digital product is “in Maryland” is determined by the customer’s tax address. If that address is a Maryland address, then the sale is “in Maryland.” The law defines “customer tax address” as follows:
- for a digital product that is received by a buyer at the business location of the vendor, the address of that business location;
- if item (1) of this subsection is not applicable and the primary use location of the digital product is known by the vendor, that primary use location;
(3) if items (1) and (2) of this subsection are not applicable, the location where the digital product is received by the buyer, or by a donee of the buyer that is identified by the buyer, if known to the vendor and maintained in the ordinary course of the vendor’s business;
(4) if items (1) through (3) of this subsection are not applicable, the location indicated by an address for the buyer that is available from the business records of the vendor that are maintained in the ordinary course of business of the vendor’s business, when use of the address does not constitute bad faith;
(5) if items (1) through (4) of this subsection are not applicable, the location indicated by an address for the buyer obtained during the consummation of the sale, including the address of the buyer’s payment instrument, when use of the address does not constitute bad faith; or
(6) if items (1) through (5) of this subsection are not applicable, including a circumstance in which a vendor is without sufficient information to apply those items, one of the following locations, as selected by the vendor, provided that the location is consistently used by the vendor for all sales to which this item applies: (i) the location in the United States of the headquarters of the vendor’s business; (ii) the location in the United States where the vendor has the greatest number of employees; or (iii) the location in the United States from which the vendor makes digital products available for electronic transfer.
The foregoing is intended merely as a brief, top-level overview of the new law. There are numerous other details vendors must consider to determine if they’re selling a taxable “digital product” and, if so, to what extent a sale is taxable. For example, if a vendor makes a retail sale of two or more items where at least one of them is a taxable digital product and the items are billed as a lump sum (rather their prices being separately stated), the sale will be considered a “bundled transaction” and the entire lump sum price will be taxable.
To learn more, reach out to C.J. Persson at [email protected] or any of her colleagues. For full text of the law, see https://mgaleg.maryland.gov/mgawebsite/Legislation/Details/HB0932?ys=2020RS.