The Maryland House of Delegates is considering legislation (House Bill 426) that would impose sales and use tax on digital products and sales tax on digital codes. If signed into law, Maryland would begin taxing digital products and digital codes on July 1, 2019. House Bill 426 was read for the first time in the Ways and Means Committee on January 31, 2019.
Summary of House Bill 426
House Bill 426 would amend Maryland’s definition of a taxable “retail sale” to include the sale of a “digital product,” which includes common content like digital music, digital video, e-books, and e-periodicals, and the sale of digital code. Under the bill, use tax also would apply to the use of digital products in the state, but not the use of digital codes. All revenues from the new tax are earmarked for the state’s Transportation Trust Fund.
Defined Terms
The bill defines “digital product” to mean “a product that is obtained electronically by the buyer and delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.” House Bill 426 specifically includes the following in the “digital product” definition:
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Audio – “a work that results from the fixation of a series of sounds that are transferred electronically” (including music or performances, readings of books, speeches, and audio greeting cards sent by e-mail) and ring tones;
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Video – “a series of related images that, when shown in succession, impart an impression of motion, together with any accompanying sounds, that are transferred electronically, including motion pictures, musical videos, news and entertainment programs, live events, video greeting cards sent by e-mail, and video or electronic games”;
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E-Books – a book transferred electronically; and
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E-Periodicals – “a newspaper, magazine, periodical, chat room discussion, weblog, or other similar product that is transferred electronically.”
And, finally, House Bill 426 defines “digital code” as a code that “provides a buyer with a right to obtain one or more specified digital products.” Under the bill, the digital code may be in tangible form (such as a card) or may be obtained through e-mail. “Digital code” does not include gift cards with a monetary value redeemable for a specified digital product.
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Eversheds Sutherland Observation:
House Bill 426 uses similar, but not identical, terms and concepts adopted by the Streamlined Sales and Use Tax Agreement. For example, the term “permanent use” derives from section 332(D)(2) of the Agreement (“perpetual or for an indefinite or unspecified length of time”), but the bill does not define that term. Further, House Bill 426 does not include the Agreement’s “end user” concept. While the bill includes sale for resale and component part exclusions for the retail sale and use of digital products in the state, the Agreement’s end user concept more comprehensively avoids taxing wholesale sales of digital products than the traditional exclusions adopted by the bill.
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Imposition of Tax
If House Bill 426 were enacted, Maryland sales tax would apply to retail sales of digital products sold with rights to permanent use or less than permanent use and with rights conditioned on continued payment by the buyer. Maryland sales tax also would apply to sale of a “subscription to, access to, or the purchase of a digital code for receiving or accessing digital products.”
House Bill 426, however, provides that the following would be excluded from Maryland sales tax when the buyer intends to:
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Resell the digital product in the form that the buyer receives or is to receive the product;
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Use or incorporate the digital property in a production activity as a material or part of another digital product to be produced for sale; or
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Transfer the digital product as a part of a taxable service transaction.
In addition, the proposed sales tax on digital products would not apply to a retail sale of a digital product if the transaction is subject to tax under another provision of Maryland tax law.
The bill also imposes use tax on digital products, subject to similar exclusions as those described above for sales tax purposes. Maryland use tax would not apply to the “exercise of a right or power over a digital code to receive or access a digital product.”
Neither sales tax nor use tax would apply to a sale of a digital product for use or consumption in research and development.
The bill does not provide specific sourcing rules to determine whether the sale or use of the digital product occurs in Maryland. Instead, the legislation simply provides that the Maryland sales or use tax would apply to the retail sale or taxable use of digital products “in this state,” like the current law imposing tax on retail sales of tangible personal property and taxable services. Therefore, it is expected that the Maryland Comptroller would need to update existing sourcing regulations to reflect the changes made by House Bill 426.
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Eversheds Sutherland Observation:
By providing the enumerated digital content (audio, video, e-books, and e-periodicals) as mere examples of digital products, the base definition of “digital products” could encompass numerous other digital goods and services, which likely would create significant confusion regarding the appropriate application of Maryland sales and use tax.
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