Key Takeaways
- Starting on July 1, any web hosts located in and/or serving Maryland clients must charge a 3% or 6% tax on services.
- This means that any provider offering services under NAICS sectors 518, 519, 5415, or 5132 are required to participate.
- Contracts signed before July 1 are exempt for now, but will apply once renewed, modified, or billed after July 1.
Starting July 1, 2025, Maryland will impose a 3% sales and use tax on digital and IT services, including cloud hosting, data processing, SaaS, and software publishing. A purchase for use by an individual will be subject to taxation at a 6% rate.
This means web hosts serving clients in Maryland must begin charging the 3% tax on eligible services, regardless of the host’s own location.
Historically, sales taxes were reserved for tangible goods, not services. But as the economy transitioned into digital-based models, traditional revenue models had a hard time keeping up.
This meant while local Maryland businesses that sold tangible goods were taxed, providers like AWS, Google Cloud, and other SaaS vendors were not. It didn’t seem fair, so equity concerns rose.
A Maryland official who preferred to stay anonymous said: “This is attempting to fill in holes. It is making sure that the system is rounded out and treating this more equitably and efficiently.”
One estimate suggests that the new 3% sales tax will bring in approximately $500 million per year.
How Maryland’s Tax Will Hit Web Services
Until now, Maryland didn’t tax most B2B IT services, and was by default more business-friendly than states like Texas and Connecticut, which tax cloud services, or New York, which taxes some SaaS offerings.
This changes with TB-56 and Chapter 604, which is essentially Maryland’s way of bringing digital services into the state tax pool. It’s unique because it uses NAICS codes, which simultaneously makes it more complicated for hosts offering bundled or hybrid services to differentiate in which code they fall.
| NAICS Sector | Covered Services | Tax Rate | Applied To |
|---|---|---|---|
| 518 | Hosting, cloud storage, IaaS, PaaS | 3% | Web hosting (B2B), internal cloud usage |
| 519 | Web search portals, libraries, archives | 3% | Content indexing, archive services |
| 5415 | Custom IT systems, software design | 3% | Custom-built tools or platforms |
| 5132 | Software publishing (non-custom) | 3-6% | SaaS: 3% for enterprise, 6% for personal |
What Hosts Have to Know About Exemption/Timing
Contracts signed before July 1, 2025, are only exempt if the contracts remain unchanged. But if the contract is renewed, extended, modified, or if payments are due after July 1, the new tax applies. The same goes for subscriptions.
There are some exemptions, though most hosts won’t qualify:
- Resale exemption: Hosts can claim it only if the service is resold as-is, like reselling cloud storage. (Note this won’t count if hosts use that storage to run their own platform.)
- Cybersecurity and R&D exemptions: Some “qualified” cybersecurity companies and firms in the UMD Discovery District working on quantum computing are exempt.
- Multistate use: If a service is used partially outside of Maryland — for example, if a client has two offices, one in Maryland and one in New York — clients can use a Multiple Point of Use (MPU) certificate to split the tax fairly.
| Service Type | Tax Rate | Who Pays | Notes |
| Web Hosting (B2B) | 3% | Maryland-based clients | Standard business hosting is now taxed |
| SaaS: Enterprise Use | 3% | Maryland-based business clients | A lower rate applies for business or commercial use |
| SaaS: Personal Use | 6% | Maryland individuals or small businesses | That higher rate applies if not used for a business |
| Cloud/IaaS/PaaS (resold) | 0% | End customer (host holds resale cert) | Only exempt if resold exactly as purchased |
| Cloud/IaaS used internally | 3% | Hosting provider (no resale cert) | Tax applies as normal, even if used within your own platform |
| Custom Software Development | 0% (maybe) | Depends on scope | May be exempt if tailored to one client and not sold as a product |
| Contract signed pre-July 1 | 0% (initially) | Client | Safe until contract changes, renews, or bills after July |
| Subscription billed after July 1 | 3% or 6% | Client | Tax applies as normal |
| Affiliate/Internal Billing | 3% | Hosting company | Still taxed even if billed between related businesses |
| Federal/State Client Contracts | 3% | Contractor | Hosts can’t use a government client’s exemption for their purchase |
| Multi-State Clients (MPU Cert) | Varies | Client (self-reports) | Clients can split the tax if the service is used in multiple states |
What Web Hosts Need to Know
- Prepare for client pushback: Small businesses aren’t going to love the surprise 3%-6% charge, especially if they’ve never seen a sales tax on digital goods. Clear communication should take priority since the tax can be mistaken for a hidden fee or an unprecedented price hike, which would pose issues for customer service teams.
- Start getting compliant now: Maryland-based providers and any out-of-state hosts serving Maryland clients must now register for Sales & Use Tax, audit existing contracts (especially those that are multistate or multiyear), and consider training internal teams for new tax scenarios (such as renewals, affiliate billing, MPU certificates).
- Audit your offerings: The line between custom software and standard SaaS is, unfortunately, still blurry (such as “bespoke” additions on top of regular SaaS platforms). If hosts offer hybrid plans, they should expect some bureaucratic red tape. Once done, be sure to update CRM and billing systems to auto-apply 3% or 6% based on service use.
