Maryland updates digital products sales tax guidance

In detail

The revised Tax Tip #29 reflects both revisions to the law enacted in S.B. 787 and changes in approach to the issue of digital products taxation by the Comptroller’s Office. The following highlights some of the major revisions but is not intended to be a comprehensive review of the revised guidance or the amendments enacted in S.B. 787. See PwC’s Insight on S.B. 787 and PwC’s Insight on the Comptroller’s original guidance for further details.

Defining taxable digital products

The revised Tax Tip #29 deletes the “non-exclusive list of digital products the sale of which is subject to the sales and use tax if obtained and delivered by electronic means[.]” The Comptroller’s original guidance had significantly expanded the statutory list of items considered digital products, with the resulting list being more comprehensive than in any other state.

The revised guidance moves some of the “digital products” from the former “non-exclusive list” to separate sections of the document and provides detail and the Comptroller’s rationale. Many of the categories of taxable digital products generally are in line with the approach taken in other states. For example, there is a new section on the taxation of “a book, e-book magazine, newspaper, periodical or similar product...whether delivered electronically or in tangible form.”

The revised guidance also maintains the position that the sales and use tax applies to the sale of “customer lists, mailing lists, medical records, and similar products.”

Observation: The revised guidance adopts the concept that otherwise nontaxable services do not become taxable services merely because they involve delivery of a digital product. For example, the revised guidance recognizes that a contract with an advertising agency may involve components of both non-taxable services and the production of a product that is either tangible personal property or a digital product.

However, certain categories remain from the original guidance that seem to expand on the statutory language. For example, the revised guidance provides that a digital product includes “a chat room, discussion, weblog, or any other venue that permits users to communicate electronically in real time.” The law provides that a “digital product” includes “a newspaper, magazine, periodical, chat room discussion, weblog, or any other similar product that is transferred electronically.” The revised guidance appears to take the position that a digital product includes electronic communications.

Treatment of digital codes

A digital code is defined as a number, symbol, alphanumeric sequence, barcode, or similar code that provides a buyer with a right to obtain one or more digital products. A digital code may be obtained by any means, including in tangible form or electronically. A digital code does not include a gift certificate or gift card with a monetary value that may be redeemable for an item other than a digital product, however.

The revised guidance provides examples of how these statutory provisions are to be implemented by the Comptroller. In one example, a sale of a gift card at a retail store “is subject to the sales and use tax because it is a sale of a digital code that only entitled the customer to purchase digital products” -- in this case, “to purchase and download prerecorded music from another vendor’s website.” The redemption of the gift card for prerecorded music is not considered subject to tax.

Another example employs the same facts, except that the gift card can be used to purchase goods and download video games at another vendor’s website. Because the gift card is redeemable for an item other than a digital product, the sale of the gift card at the retail store is not subject to sales and use tax (and presumably the goods -- if taxable -- and downloaded video games would be deemed subject to tax when the gift card is redeemed).

Observation: Retailers will need to determine how to charge tax at the point of sale of both the digital code and the items purchased with the digital code, with the taxability of the former dictating the taxability of the latter.

Sourcing and multiple points of use

The revised guidance notes that the retail sale of a digital code or a digital product is presumed to be made in the state in which the “customer tax address” is located. The guidance provides a hierarchy for determining the customer tax address, including:

• The vendor’s business location if the digital code or product is received by a buyer at that location,
• The buyer’s primary use location if it is known by the vendor, or
• The location of receipt by the buyer or the buyer’s donee if identified by the buyer and known to the vendor and maintained in the ordinary course of the vendor’s business.

In one example, the purchaser is headquartered in Maryland, but its purchase order indicates the “that the particular purchaser is Buyer's division located in Colorado and Buyer's purchase order further contains a ‘Ship To’ address for the Buyer's division located in Colorado.” The purchaser’s primary use location is not known by the vendor. In this circumstance, although the SaaS transaction does not qualify as customized software, the transaction is not considered a retail sale in Maryland and the vendor is not required to collect and remit sales and use tax.

The revised guidance also provides, “if a digital code or digital product will be used [by] a buyer’s employees or equipment in multiple states, the sale is subject to Maryland sales and use tax to the extent used by employees or equipment in Maryland.” In such cases of multiple points of use, the buyer “must determine the percentage of employees or equipment in and outside of Maryland using a reasonable methodology and notify the vendor [of] the percentage of use in Maryland.”

If the vendor receives a written statement from the buyer at the time of sale, the vendor “may charge Maryland sales and use tax based on the percentage of use in Maryland.” However, the guidance states, if the vendor does not receive such a statement, it must charge sales tax under the general sourcing hierarchy, and the purchaser may seek a refund based on the percentage of use outside of Maryland.

Observation: The guidance does not allow purchasers to remit use tax based on their in-state use, but instead requires sellers to collect tax based on written representations from the purchaser (or, without such representations, under the general sourcing hierarchy).