US - Maryland Sales and Use Tax Guide

Sales and Use Tax Basics in Maryland

Sales Tax

Sales tax is a statewide tax applicable to the purchase of most tangible personal property, or tangible goods, and certain listed services. It is essential to note that, generally, tangible goods are subject to sales tax, unless specifically exempt from taxation. 

Additionally, in Maryland, transactions involving electricity, natural gas, and the right to reside in or rent a room, such as a hotel room, are treated in the same manner as transactions involving the sale of tangible goods.

Use Tax

In situations where tangible goods are purchased outside of Maryland and no sales tax is paid and remitted to the Comptroller, the use tax applies. The same applies in cases where consumers make tax-free purchases outside of Maryland but bring or have the tangible goods shipped to them in Maryland.

Maryland Sales and Use Tax Rates

Maryland has a statewide 6% sales and use tax and does not impose any local taxes. However, certain transactions are subject to different tax rates. For example, car and recreational vehicle rentals are taxed at 11.5%, and truck rentals are taxed at 8%. Additionally, sales of alcoholic drinks are taxed at 9%

Tax-Exempt Transactions

Tax-exempt transactions can be categorized into three distinct groups. The first one is sales made to exempt organizations, such as cemetery companies, credit unions, veterans' groups, volunteer fire, ambulance, and rescue companies, as well as various non-profit organizations located in Maryland. Therefore, when sellers make sales to these organizations, they are not required to charge and collect sales tax.

The second group of tax-exempt transactions is sales made by exempt organizations. These transactions include sales made by religious organizations, sales of magazine subscriptions by elementary or secondary schools located in the state of Maryland, and sales of food to support nationally recognized veterans of the United States armed forces.

Additionally, casual or isolated sales are exempt from sales and use tax if the price of the product or service being sold is less than USD 1,000 and the sale is not made through a dealer or auctioneer.

Notably, even when the sale of tangible goods is taxable, the Maryland Law does provide certain exemptions. Regarding service, they are generally exempt from sales and use tax, unless specified as taxable.

Nexus Rules in Maryland

For taxable persons to be subject to Maryland sales and use tax rules and regulations, individuals or businesses must have some kind of connection with the state. The connection can be established through physical presence in the state, as well as through economic presence. Therefore, there are three types of presence, or nexus, that taxable persons can establish in the State of Maryland.

Physical Nexus

If taxable persons maintain a physical location in Maryland, such as an office, or own, use, or rent office space or manufacturing equipment, they are considered to have a physical presence in the state and are subject to sales and use tax. Additionally, if out-of-state taxable persons have employees or representatives who conduct business, such as accepting orders or collecting payments, they are considered to have a physical presence. 

Installing or assembling products, storing inventory, and providing repairs, training, or technical support are all activities that establish a physical nexus. Finally, operating mobile stores, such as trucks from which sales are made directly in the state, also creates a nexus.

Economic Nexus

Economic nexus in Maryland is defined as the Maryland Sales and Use Tax Nexus for Out-of-State Vendors, and was introduced in 2018, following the South Dakota v. Wayfair ruling. Under the economic nexus rules, out-of-state vendors or sellers that do not have a physical presence in the state must register for sales tax and collect and remit tax on retail sales of tangible goods and taxable services for delivery in Maryland if they meet certain conditions.

Therefore, if taxable persons' gross revenue from taxable sales exceeds USD 100,000 or they have 200 or more separate transactions relating to sales of tangible goods or taxable services in the previous or current year, they are liable for collecting and remitting sales tax to the Comptroller.

Marketplace Nexus

Marketplace nexus is a special type of rule introduced in 2019 for marketplace facilitators, which are liable for collecting Maryland sales and use tax on a retail sale or sale for use by a marketplace seller to a buyer in Maryland if gross revenue from taxable sales exceeds USD 100,000 or they have 200 or more separate transactions relating to sales of tangible goods or taxable services in the previous or current year.

Taxable Goods and Services in Maryland

As previously stated, most sales of tangible goods are subject to sales and use tax. Sales of items such as accommodation, artificial gas, coal, electricity, farm equipment, natural gas, nuclear fuel assemblies, oil, steam, and wall-to-wall carpeting installed into real estate are all included in the list of taxable goods.

Generally, the sale of all clothing, footwear, and accessory items, as well as the sale of books, magazines, newspapers, office supplies, and computer hardware, is subject to sales and use tax, unless otherwise exempt.

The list of taxable services includes fabrication or printing of tangible goods by special order, commercial cleaning of textiles and buildings, and a range of telecommunications services such as mobile and custom calling, pay-per-view TV, and telephone answering. 

Furthermore, taxable services include credit reporting, security services, and the delivery of electricity or natural gas when their sale is taxable. Additionally, prepaid phone services and the privilege of consuming personally provided wine at restaurants, clubs, or hotels are also subject to taxation.

Bundled Transactions and the True Object Test

The retail sale of two or more items or products that are not stated separately and are sold for a single price is considered a bundled transaction. These transactions may include tangible goods, taxable or non-taxable services, or a digital product.

General rules for these bundled transactions are that the entire price is taxable if it includes the sale of a digital product and a non-taxable service or non-taxable tangible good, provided the primary purpose of the sale is to obtain the digital product. Notably, sales and use tax do not apply to any fees relating to personal, professional, or insurance services that are not taxable but involve a sale of a digital code or digital product.

E-Commerce Framework

Out-of-state vendors or sellers that exceed the economic nexus threshold, set at USD 100,000 gross revenue or 200 or more separate transactions in a previous or current calendar year, must register for, collect, and remit sales tax on retail sales of tangible goods or taxable services for delivery into Maryland.

The registration is required by the first day of the following month in which either of the criteria is met. In addition to this mandatory registration, out-of-state or remote sellers can voluntarily register for Maryland's sales tax.

However, out-of-state vendors or sellers that made taxable sales through online marketplaces must pay attention to rules specifically developed for those situations.

Marketplace Rules

Taxable persons offering and selling taxable goods and services through marketplaces are commonly referred to as marketplace sellers. Similarly to other out-of-state sellers or vendors, they are considered taxable persons under the Maryland Law.

However, if a marketplace operator or facilitator collects and remits the applicable sales and use tax, a marketplace seller is not required to collect sales tax on sales facilitated by the operator or facilitator. This means that the consumer pays the tax directly to the marketplace facilitator, which remits it directly to the Comptroller. 

Marketplace sellers that exclusively sell goods and services through a marketplace facilitator are not required to register for sales tax. However, if marketplace sellers also make sales outside the marketplace, known as direct sales, they are required to register for, collect, and remit sales tax on those transactions.

One additional requirement for marketplace sellers is that they must keep and, upon request, provide records of all sales, regardless of whether they sell directly, only sell through marketplace facilitators, or a combination of both.

Digital Goods and Services

Under the Maryland law, digital products are those obtained electronically by the consumer or delivered by means other than tangible storage media. This includes audio works such as music, live performances, book readings, and speeches, as well as audio greeting cards sent via email and downloadable sound files, including ringtones. 

It also includes visual media, such as videos, movies, live broadcasts, video games, and video greeting cards, especially when these contain moving images and sound. Additionally, digital products include electronic books and publications, such as newspapers, magazines, periodicals, blog posts, and chat room discussions, as long as they are delivered electronically.

The sale of canned software products accessed by physical medium, such as a CD-ROM, load-and-leave software, or by similar means, is subject to sales and use tax. Additionally, since 2021,  the sale of canned software obtained electronically by the consumer is a digital product and is also taxable. Therefore, transactions referring to the sale of software as a service (SaaS) are subject to sales and use tax.

The sale of a subscription to, access to, or the streaming of digital products, as well as the purchase of a digital code for receiving or accessing them, to an end user, is considered a retail sale. Consequently, such sales are subject to sales and use tax.

Furthermore, the sales and use tax applies to transactions relating to granting the right to access, download, stream, or use video or online games, including downloading or using virtual items, such as avatars, backgrounds, skins, renders, and in-app purchases.

Digital Marketplace

Digital marketplaces that meet the requirements set by Maryland are liable for registering for, collecting, and remitting sales tax to the Comptroller on behalf of the marketplace sellers. However, the first step in the process is determining who falls under the scope of the marketplace facilitators.

To be considered a marketplace facilitator, individuals or businesses must facilitate retail sales by listing or advertising the sale of tangible goods, collect payment from a buyer, and transmit it to a marketplace seller. 

Digital Platform Operator

Marketplace facilitators that establish the marketplace nexus by exceeding USD 100,000 or 200 or more separate transactions threshold must collect state sales and use tax on each facilitated retail sale or sale for use by a marketplace seller to Maryland's consumers.

An additional essential requirement for marketplace facilitators is that they must report sales and use tax collected from direct sales separately from the tax they collect when acting as a marketplace facilitator. Under Maryland Law, marketplace facilitators are required to file monthly tax returns.

Filing and Payment Requirements in Maryland

Filling and payment frequency depend on the amount of sales the vendors or sellers collect during a year. For example, those with annual sales tax collections of up to USD 15,000 are required to file tax returns monthly. Those who remain under the USD 5,000 threshold are eligible for quarterly tax return filings. Tax returns may be filed in paper form and mailed to the Comptroller or electronically through the Comptroller's website. 

Penalties for Non-Compliance with Sales and Use Tax Requirements

Taxable persons who fail to meet filing and payment deadlines may face a 10% penalty added to the due tax, as well as an interest penalty of at least 1% per month.