Just before the close of the 446th legislative session, the Maryland General Assembly passed and sent to Governor Moore HB 352/SB 321, the Budget Reconciliation and Financing Act of 2025 (the “BRFA”). The BRFA, which Gov. Moore is expected to sign, makes significant changes to Maryland’s tax laws, including, among various other changes, expanding the sales tax base, adding new tax brackets to the Maryland income tax, and adding a new tax on capital gains. These changes, in addition to others included in the BRFA, are meant to address the roughly $3 billion budget deficit that was projected when the legislative session began.
Expansion of Taxable Services
Under Maryland law, in general, all sales of tangible personal property and certain intangible assets are subject to Maryland’s 6% sales tax, while sales tax is imposed only on the sale of certain services specified in Tax-General (“TG”) § 11-101(m). The BRFA added two new categories of taxable services (the “new taxable services”):
- Data or information technology services under NAICS[1] sector 518 (computing infrastructure providers, data processing, web hosting, and related services), 519 (web search portals, libraries, archives, and other information services), or 5415 (computer systems design and related services) and
- System software or application software publishing services under NAICS sector 5132 (software publishers).
The tax rate for the new taxable services is 3% (rather than the usual 6%); however, if the same transaction could also be taxable under another category of taxable sales, including the sale of digital products, the 6% sales tax rate applies.
Even when a Maryland recipient of the new taxable services does not pay the sales tax to the vendor, they would presumably be obligated to pay a 3% use tax on the contract amount. The BRFA, in fact, expands TG § 11-403 to explicitly impose this use tax obligation on buyers of digital codes, digital products, and the new taxable services (collectively, “digital goods and services”). Specifically, buyers who know that the digital goods and services will be available for use in more than one taxing jurisdiction can deliver a certificate to the vendor indicating the multiple points of use, which will relieve the vendor from collecting the sales tax and the buyer, instead, must remit the applicable sales tax to the Comptroller.
In addition to other exemptions available under current law (such as certain sales to nonprofit organizations), exemptions from sales tax on the new taxable services are provided for the sale of “cloud computing” to a “qualified cybersecurity business,” as well as for certain sales by or to a “qualified company” located in an “emerging technology development area” (relating to the University of Maryland Applied Research Laboratory for Intelligence and Security).
This new sales tax is effective July 1, 2025.
The effective date in the BRFA does not specifically “grandfather” these new taxable services provided after June 30, 2025, pursuant to contracts entered into before July 1, 2025, though, based on certain statements we understand were made by a legislator in connection with the enactment of the BRFA, it’s possible that future regulations or guidance may address this.
Additional Individual Income Tax Brackets and Net Capital Gains Tax Rate
Currently, the maximum marginal individual state income tax rate is 5.75% for individuals with Maryland taxable income in excess of $250,000 ($300,000 for joint filers), with no separate tax rate for capital gains. Under the BRFA, effective July 1, 2025, for tax years beginning after December 31, 2024:[2]
- There is a new 6.25% tax bracket for Maryland taxable income of $500,001 through $1,000,000 ($600,001 through $1,200,000 for joint filers);
- There is a new 6.50% tax bracket for Maryland taxable income in excess of $1,000,000 ($1,200,000 for joint filers);
- There is a new 2% tax imposed on net capital gains included in the individual taxpayer’s Maryland adjusted gross income (applicable to all tax brackets). This capital gains tax is in addition to, and not in lieu of, the tax already imposed on Maryland taxable income; and
- The maximum income tax rate that counties (including Baltimore City) are authorized to impose is increased from 3.20% to 3.30% effective for tax years beginning after December 31, 2024.[3]
Conclusion
This is only a summary of certain provisions of the BRFA, which contains a multitude of other changes (such as removing the sales tax exemption on vending machine snack food sales, increasing the motor vehicle excise tax from 6% to 6.5% and increasing the sales and use tax rate on cannabis to 9% for 2025 and 12% thereafter); so individuals and businesses should discuss the impact of these and other changes with their tax attorneys, accountants, and other tax and financial advisors.
[1] NAICS stands for “North American Industry Classification System” and a business entity generally reports the NAICS code applicable to its business on its federal and state income tax returns.
[2] Recognizing that taxpayers have started making estimated payments based on existing tax brackets and rates, the BRFA directs the Comptroller to waive any interest and penalties related to the payment of estimated income taxes if the Comptroller determines that the interest or penalty would not have been incurred but for the BRFA changes.
[3] The BRFA includes a modification of the timing rules for changing local income tax rates set forth in TG § 10-106(a)(1). If a county, including Baltimore City, wants to adjust its income tax rate for tax years beginning during the 2025 calendar year, it must notify the Comptroller on or before May 15, 2025.
