[co-author: Anna Jones]
Maryland Gov. Wes Moore recently signed the $67 billion state budget for 2026 (HB 352) that will make significant changes to the state’s tax system. Among other changes, the budget bill notably establishes a new tax on IT services; imposes a surtax on capital gains; and increases the sales and use tax rate on cannabis. Here is how these key tax provisions might impact individuals, businesses and consumers.
IT Services Tax
(HB 352, Section 9, amending Md. Code Ann., Tax-Gen. § 11-104)
The bill establishes a 3% tax on information technology and data services as described under NAICS sector codes 518, 519 or 5415 and system software or application software publishing services as described in NAICS sector code 5132. In application, the tax applies to the sale or use of certain services that involve the use of computers, software or the Internet, such as data processing, hosting, cloud computing, software as a service (SaaS), web design, cybersecurity and online advertising. The tax would not apply to those services exempt from the sales and use tax, such as health care, education and financial services. It also does not apply to certain services that are subject to the sales and use tax, such as telecommunications, cable and satellite services. Additionally, cloud computing services sold to cyber security companies are exempt from the tax, as well as any taxable services sold to a company that contracts with or is located within the University of Maryland’s Discovery District in Prince George’s County.
The bill does allow the purchaser of a taxable IT service to present a Multiple Point of Use certificate (MPU), which relieves the vendor of the responsibility to charge sales tax and instead requires the purchaser to accrue and remit the tax. An MPU can be submitted if the purchaser knows the product is available in multiple states simultaneously or resold in its original form to an affiliated group or related pass-through entity, of which the buyer is also a member. Once an MPU is presented, the purchaser may use any reasonable but consistent method of apportionment to reflect the primary use location.
The state comptroller has recently proposed regulations that would allow resale certificates to be issued for IT services that are purchased and resold as part of a taxable service. For example, under the comptroller’s proposed regulations, a web hosting company could rent server space from a cloud storage company tax-free if, instead of using the cloud storage itself, the hosting company provided the storage to a customer as part of its taxable web hosting services. The proposed legislation would also allow a buyer to apply for a refund of any paid IT services tax if the taxable service, or any portion thereof, was ultimately unused and resold to a customer. Additionally, the proposed regulations modify the exemption for maintenance contracts, which provides that unless the contract is required to be purchased as a condition of sale of a taxable service, the contract shall be exempt.
Information technology and data services are widely used by businesses and consumers in Maryland and across the country. Accordingly, the tax may increase the cost of these services and create administrative and compliance challenges for both the state and taxpayers, as the definition and classification of the taxable services may be unclear, complex and evolving.
It is unclear what form the MPU certificate will take and whether the purchaser would need to register in Maryland for sales and use tax purposes in a similar manner as a direct pay permit. While Maryland has a broad business-to-business sales and use tax exemption in place for many software and SaaS transactions, it is unclear how this new tax may alter such an exemption. IT and data service providers and users should monitor the development and implementation of this tax and the possible impacts on their operations and budgets.
Capital Gains Surtax
(HB 352, Section 6, amending Md. Code Ann., Tax-Gen. § 10-105)
The bill imposes a 2% surtax on certain net capital gain included in Maryland taxable income for tax years 2025 through 2028. The surtax applies only to individuals with federal adjusted gross income in excess of $350,000. It does not apply to any amount of capital gain from the sale or exchange of certain assets, such as a primary residence sold for less than $1.5 million, assets held in retirement savings plans or property used in a trade or business that is eligible for expensing under Section 179 of the Internal Revenue Code.
This provision effectively increases the state income tax rate on net capital gains for high-income taxpayers from 5.75% to 6.75% (or higher, depending on the local income tax rate). It may reduce the after-tax return on investment for such taxpayers and may affect their decisions on when and how to realize capital gains
The bill also includes a provision that phases out the option of itemized deductions, meaning that the amount of itemized deductions that may be claimed by individuals will be reduced by 7.5% of the amount by which their federal adjusted gross income exceeds certain thresholds ($100,000 for married individuals filing separately and $200,000 for all other individuals) starting in tax year 2025 (amending Md. Code Ann., Tax-Gen. § 10-218). Accordingly, these two provisions in tandem may drastically increase tax liabilities for high-net-worth individuals.
Taxpayers who are planning to sell or exchange capital assets in the next few years may want to consult their tax advisors on the potential impact of this surtax and possible strategies, including legal entity creation, strategic sales of capital loss assets, maximization of contributions to retirement savings plans and maximization of itemized deductions to the extent possible and in line with the new sections of the Code.
Cannabis Sales and Use Tax Rate Increase and Distribution
(HB 352, Section 8, amending Md. Code Ann., Tax-Gen. § 11-104)
The bill increases the sales and use tax rate imposed on the retail sale of adult-use cannabis from 9% to 12% beginning in fiscal 2026 and alters the distribution of sales and use tax collections from the sale of cannabis.
This provision increases the tax burden on consumers and retailers of adult-use cannabis in Maryland. The provision also would change the allocation of the tax revenue among various state and local funds and programs, which may have different effects on the public health, safety and economic development goals related to cannabis legalization and regulation. Cannabis businesses and consumers should be aware of the tax rate change and the potential implications for their operations and budgets.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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