Yes. In Maryland, SaaS (software as a service) is considered a digital product, which means that most B2C (business-to-consumer) sales are taxed. However, there are several exemptions and exceptions, and most B2B (business-to-business) sales are not taxed.
The current tax rate for SaaS in Maryland is 6%. There are no additional local or municipal taxes in Maryland, so the amount you’re required to collect does not vary based on where in the state a customer is located.
SaaS providers that have nexus in Maryland must collect and remit sales tax on taxable sales (we’ll discuss nexus in more detail later in this article).
No matter the size of your company or the type of software you sell, you must understand SaaS taxability in Maryland to maintain compliance. If you don't comply with the state's taxation rules, you could face significant fines and penalties. Failing to properly address tax obligations could also result in audits and reputational damage that could affect your business operations.
SaaS taxation rules in Maryland
In 2021, Maryland enacted a law that allows the government to collect sales taxes on certain SaaS products and digital goods when sold to consumers (most B2B transactions are exempt).
In Maryland, SaaS is considered a digital good, which is why it's taxed. According to Maryland's tax laws, a digital product is any item that can be purchased electronically. However, custom commercial software and enterprise software do not not need to be taxed.
Companies that have nexus in Maryland are required to collect and remit tax on taxable sales. There are two types of nexus: physical and economic.
A company has physical nexus in Maryland if it has a physical presence in the state — such as an office, inventory, or employees.
A company has economic nexus in Maryland if its gross revenue is at least $100,000 or if it conducts at least 200 separate transactions in the state during a calendar year.
When you establish nexus in Maryland, you must start collecting taxes immediately.
Exemptions and exceptions
There are several exemptions and exceptions. For example, some organizations and associations are exempted from paying sales taxes in Maryland, including:
- Religious and educational organizations.
- Nonprofit charitable companies.
- Nonprofit cemetery companies.
- Government agencies.
- Volunteer rescue squads and fire companies.
- Credit unions.
There are also several exemptions for B2B transactions. Many B2B SaaS transactions are automatically exempted because Maryland defines the software as custom. If the buyer has an intellectual property interest in a SaaS product, the purchase of this software will also be exempted from taxes.
The product must be used strictly for commercial purposes for it to be exempt. For example, let's say that a buyer has an intellectual interest in a SaaS product that they intend to use for marketing and advertising activities. This transaction should be exempted.
Example: How local tax rates may apply
Let's say that your business provides customers with an application for managing documents or photos like Dropbox. In this situation, customers would need to buy a monthly or annual subscription, which means that they don't gain full ownership of a product. If a customer is an individual, the subscription will be taxed at a rate of 6%.
No matter where the customer lives in Maryland, the tax rate will always be 6%. Local sales taxes aren't collected by city or county governments, which makes it relatively easy to calculate how much you need to collect from customers (many states have varying local and municipal taxes in addition to a state tax).
Navigating compliance in Maryland
If you provide consumers with digital products and SaaS solutions, make sure you properly calculate, collect, and remit taxes to avoid penalties. A first step in this process is registering for a sales and use tax license in Maryland. If you have nexus, apply for this license immediately.
After you receive the sales tax license, collect 6% in taxes for every taxable transaction on SaaS goods. If an organization claims that it's exempt from paying taxes, verify this information. Your company must file regular sales tax returns. Depending on your sales volume, these returns need to be filed quarterly, monthly, or annually. When you start out, your returns will be due every quarter.
After filing your tax returns, remit the sales taxes you've collected. Penalties for late payments can be as high as 25% of the amount you owe.
If you currently owe sales tax but have yet to collect it from your customers, you may qualify for the voluntary disclosure agreement (VDA) program. Companies that qualify for this program will be exempt from paying taxes on past transactions. However, you can request a VDA only if the Comptroller of Maryland hasn't contacted you about your outstanding taxes.
If you no longer want to pay taxes or do business in the state of Maryland, you can seek deregistration with the Maryland Department of Assessments and Taxation. After closing your business in the state, you must still pay the taxes you owe.
You can more effectively comply with Maryland's SaaS taxation laws by using Numeral. This white-glove service helps digital goods and SaaS companies maintain compliance by automatically collecting and remitting taxes when necessary. They also offer 24/7 monitoring to ensure that you're compliant with complex tax rules across all states and municipalities.
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Additional resources for staying compliant
You can find the most recent tax rates and rulings in Maryland by accessing the Comptroller's website. They have a specific page where they post any changes that occur during the year.
The bottom line
Maryland requires most SaaS providers and other sellers of digital goods to collect sales taxes on sales made to individuals. However, most B2B transactions are exempt. To avoid paying high penalties and fees, remain compliant with the state's most recent tax laws.
The Maryland Comptroller's website is a useful resource that can help you keep track of any changes that might apply to your company. If you're seeking efficiency with compliance, consider using powerful tax management software like Numeral.
