Maryland Approves New “Tech” Tax, Higher Income Tax Rates and Capital Gains Surtax

By: Michael Colavito, SALT Director

At a glance

• The main takeaway: Maryland’s Budget Reconciliation and Financing Act of 2025 includes several notable income tax changes as well as a new 3% sales tax on a broad base of software and technology-related services. 
• Assess the impact: Several aspects of the new sales tax in Maryland will need additional guidance by the Comptroller to fully understand what types of services will be subject to sales tax.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help taxpayers assess the impact of Maryland’s state tax law changes.

Schedule a free consultation today to learn more! 

The full story

On May 20, 2025, Maryland Governor Wes Morgan signed into law the Budget Reconciliation and Financing Act of 2025 (HB 352). Several significant tax law changes are included in this legislation, such as a new 3% sales tax imposed on certain technology products and services, increased income tax rate brackets for high-income earners, a 2% capital gains tax, and a notable revision to the state’s elective pass-through entity tax (PTET). This article represents a snapshot of the tax law changes in this bill.

Understanding Maryland’s New “Tech Tax”

While the name may suggest that Maryland did not already impose sales tax on “technology,” that is not entirely accurate, as the state began imposing sales tax on “digital products” in 2021. However, HB 352 does significantly expand Maryland’s sales tax base to certain categories of technology-related services, resulting in it joining only a limited number of other states that impose sale tax on similar types of services. 

Effective July 1, 2025, the new 3% sales tax will be imposed on services that fall within the following North America Industry Classification System (NAICS) codes as set forth in the NAICS Manual published by the Office of Management and Budget (2022 Edition):

• NAICS Code 518 – Computing infrastructure providers, data processing, hosting, and other related services
• NAICS Code 519 – Web search portals, libraries, archives, and other information services
• NAICS Code 5132 – Software publishers
• NAICS Code 5415 – Computer systems design and related services

Beyond noting the applicable NAICS codes listed above, the legislation does not provide any additional information regarding the specific products and services that will be subject to sales tax. Thus, it’s likely that the Comptroller will issue informal guidance to assist taxpayers in interpreting the new tax.

Until further guidance is issued, it seems reasonable for taxpayers to assume that all products and services within the four NAICS codes (518, 519, 5132, and 5415) will be subject to the 3% sales tax as of July 1, 2025. This will result in a broad range of products and services being subject to sales tax in Maryland, including data processing, software hosting, cloud storage, web search portals, and other electronically delivery information services. Further, the inclusion of NACIS code 5415 within the scope of the new 3% sales tax will likely see services that are more closely related to information technology consulting being taxable. While NAICS code 5415 includes customized software services, which several other states also treat as a taxable service, it also includes a potentially broad scope of other services, such as:

• Designing computer systems that integrate hardware, software, and communication technologies
• On-site management and operation of computer systems and/or data processing facilities
• Other professional and technical computer-related advice and services.

The legislation also acknowledges that some of the sales that fall within the newly taxed NACIS codes are likely already subject to Maryland sales tax. The bill attempts to clarify the applicable tax rate that will apply to such sales by providing that the higher 6% sales tax rate will apply to sales that “could” be classified as a sale of taxable tangible personal property or of a digital code, digital product, or other taxable service.

Finally, Maryland’s sales tax law will now include a “multiple point of use” rule whereby a purchaser that will concurrently use one of the newly taxed services, a digital code, or a digital product in Maryland and in one or more other states is able to provide the seller with a certificate at the time of purchase indicating as such. In this case, the seller will no longer be responsible for collecting and remitting the tax; instead, the buyer will be obligated to remit use tax.

Income Tax Changes in Maryland

HB 352 also includes important income tax changes, including:

• Two new personal income tax brackets for high-income earners, including a 6.25% rate imposed on Maryland taxable income between $500,001 and $1 million and a 6.5% rate imposed on Maryland taxable income over $1 million. Previously, the highest personal income tax rate in Maryland was 5.75%. The new legislation also authorizes counties to impose their own local income tax at a rate of up to 3.3%. This is a modest increase from the previous highest allowable county rate of 3.2%. 
• A new 2% surtax on net capital gains of individuals that have an adjusted gross income over $350,000. The legislation does include several exclusions from the new capital gain surtax, including capital gains from:
  • Property used in a trade or business whose cost is deductible under IRC Section 179
  • Residences sold for less than $1.5 million
  • Assets held in 401(K) plans, certain deferred compensation plans, IRC section 408 IRAs, and ROTH retirement accounts
• An increase in the standard deduction from $2,250 to $3,350 for individuals filing separately and from $4,500 to $6,700 for joint filers.
• A reduction to the allowable amount of itemized deductions equal to 7.5% of the excess of an individual’s adjusted gross income over $200,000 ($100,000 in the case of a married individual filing separately).
• The new income tax brackets, net capital gains surtax, and changes to the standard and itemized deductions take effect on July 1, 2025, and are applicable to tax years beginning after December 31, 2024. Thus, impacted taxpayers will need to consider whether their 2025 estimated income tax payments need to be adjusted. Granted, the legislation does require the Comptroller to waive any interest or penalty relating to the underpayment of 2025 estimated payments that are solely related to the increased tax rates.
• Maryland’s elective PTET has also been revised so the PTET imposed on the distributive share of income attributable to resident owners of the PTE will no longer be subject to apportionment. Several other states have taken a similar “hybrid” approach to their PTET.  This change is applicable for taxable years beginning after December 31, 2025. S corporations should consult with their tax advisors regarding the impact of this change to help ensure that they do not run afoul of the “one class of stock” requirement under the Internal Revenue Code.

The bottom line

Arguably, the most notable tax law change in this legislation is the new 3% “Tech Tax.” There are several aspects of this new sales tax that will hopefully be addressed through informal guidance issued by the Comptroller. This will hopefully include examples of the types of services that will (and will not) be subject to sales, especially those services that may fall within NAICS code 5415. 

Further, sellers will need guidance on the types of sales that are within the newly taxable NAICS codes but that are already taxed under the previously enacted 2021 digital products legislation to help ensure that the proper rate (i.e., 6% v. 3%) is applied to those sales. The Comptroller will likely need to address the interplay of the new 3% tax on Maryland’s business-to-business exemption on the sale of enterprise software. In particular, whether such software sales will continue to be fully exempt from sales tax or if they will revert to being subject to the new 3% tax because the higher 6% “could not” apply. 

Aprio’s SALT team regularly assist clients with assessing the impact of state tax law changes. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.