SALT Rocks April 2021: Sales Tax on Digital Products & Services…Coming Soon to a State Near You?

  • Post published:April 1, 2022
  • Post category:SALT / Articles

Jeff Dorris, CPA | Mauldin & Jenkins, LLC

What exactly is a digital product? In Maryland, it includes quite a lot, including a number of “digital products” that consumers and sellers traditionally perceived as services. Sellers of digital products as defined by Maryland’s recently passed House Bill 932 must collect and remit sales tax for a slew of online purchases, tools and activities that previously escaped taxation.

As of March 14, 2021 sellers who provide Maryland-based consumers with software delivered electronically, software-as-a-service, content streaming services or digital codes must charge Maryland sales and use tax on those purchases.

The expanded definition of ‘digital products’ doesn’t stop there. In Business Tax Tip #29, Sales of Digital Products and Digital Code, the Maryland Comptroller’s Office issued guidance spelling out its broadly inclusive interpretation of the term ‘digital products’ referenced in HB 932:


“A digital product means a product that is obtained electronically by the buyer or delivered by means other than tangible storage media using technology having electronic, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.”

As a result, all of the following are now subject to Maryland sales tax “if obtained or delivered by electronic means”:

  • Ebooks, newspapers, magazines and other publications
  • Downloaded or streamed movies, videos, news, live events and entertainment
  • Subscriptions, fees and licenses to access online content, including
    • Consumer lists, medical records
    • Video games and online games
    • Classes, tutorials, courses, conferences, seminars and training sessions
    • Databases and research repositories
    • Chat rooms, discussion groups and forums
    • Graphic content such as photographs, artwork, design files, models and templates

Long story short, anything that requires paid access and is available for download or online viewing is included under the HB 932.

Nonprofit organizations in particular may face difficulty, as they must now begin charging sales tax for access to online content. This includes tax-exempt educational institutions that provide online courses, conferences and learning materials for students or the general public – a fact that could lead to legal challenges.

Under the Internet Tax Freedom Act (ITFA), discriminatory taxes that place a burden on products, services and information delivered electronically that does not apply to their counterparts delivered in another manner are prohibited. Since in-person educational activities provided by tax-exempt organizations are not subject to sales tax, this provision in HB 932 appears to be a clear violation of ITFA.

Similar charges of ITFA breach could apply to the attempt to tax access to design files such as CNC templates, virtual reality templates and 3D models as well as to discussion forums and online chat rooms related to courses delivered electronically.

Aside from potential legality concerns, with virtually no time elapsing between the law’s enactment and its effective date, online sellers are likely to face challenges in fulfilling their new sales tax obligations. (Maryland’s governor vetoed the bill but the state’s General Assembly overrode the veto on February 12, 2021.)

It’s not surprising that states are increasingly looking to tax digital products and services, as more and more of our work and leisure activities take place online. What does come as a surprise is the stunning breadth of the comptroller’s view of ‘digital products.’ We are keeping a close watch on developments surrounding Maryland’s expanded sales tax policies and will share updates if revisions to the definition are forthcoming.

In the meantime, we encourage all online sellers to proceed with extreme care as they monitor their state and local sales and use tax obligations. In the post-Wayfair world, maintaining compliance with a constantly evolving state-by-state patchwork of laws can be a formidable challenge. Contact the sales tax experts at Mauldin & Jenkins for assistance with all of your state tax needs.