Maryland Digital Services Tax Exemption Explained (2026)

Maryland has taken a notable step in refining its approach to digital services taxation. On May 12, 2026, Maryland enacted House Bill 898, introducing a targeted tax exemption for certain digital and technology-related services provided within a corporate group. The measure responds to growing concerns among corporations about the tax treatment of internal service arrangements, particularly as businesses increasingly rely on centralized digital infrastructure shared across affiliated entities.

The Scope of Tax Exemption

House Bill 898 removes tax obligations for data services, IT services, software publishing services, digital codes, and other digital products when both the seller and the buyer belong to the same affiliated group under Section 1504 of the Internal Revenue Code, which defines what counts as a controlled corporate group for US federal tax purposes.

Under the mentioned Section 1504, an affiliated group is a chain of corporations connected through a common parent company, where the parent and each subsidiary are linked by at least 80% ownership of both voting power and total value. These rules also clarify that only “includible corporations” can participate in the group, address edge cases and anti-abuse rules, and define special rules for insurance companies.

In practical terms, internal transactions between related companies within the same corporate structure will not be treated as taxable supplies under this rule, reducing compliance costs and avoiding tax leakage on intra-group digital operations.

Conclusion

Taking effect July 1, 2026, the exemption signals Maryland's recognition that internal digital service flows differ fundamentally from arm's-length commercial transactions. Businesses operating within the state should review their intra-group service agreements and billing structures ahead of the effective date to ensure they are positioned to benefit from the new rules. Going forward, the scope and administration of this exemption will be worth monitoring, particularly as digital service taxation continues to evolve at both the state and federal levels.

Source: House Bill 898, Cornell Law School