Anatomy of a New Digital Tax Strategy: From Legal Setback to Policy Innovation
In a significant development for digital taxation policy in the United States, the State of Maryland will implement a 3% sales and use tax on digital services beginning July 1, 2025, under the Budget Reconciliation and Financing Act (HB 352).
The measure targets a more focused range of taxable services, including cloud software, digital publishing, data processing, and digital products. This marks Maryland’s second and more legally cautious attempt to tax the digital economy after a controversial 2021 effort was invalidated by the courts.
Rewriting Digital Tax Law After Judicial Rejection
This legislative shift follows a 2022 Maryland circuit court ruling that struck down the state’s earlier 6% tax on digital services. The court found it conflicted with the Internet Tax Freedom Act (ITFA), the Commerce Clause, and the First Amendment. The earlier law had been enacted in 2021 and quickly faced legal and industry opposition, especially from large technology and media firms.
That version of the tax applied broadly to digital consumer services such as:
- Streaming video and music platforms
- Digital books and audiobooks
- Online newspapers and publications
- Subscription-based cable and pay-per-view services
- Downloadable content like ringtones
Critics argued the tax imposed an undue burden on interstate commerce and introduced content-based discrimination that violated federal protections.
The New Regime: Narrower Scope and Reduced Rate
Maryland’s revised approach features a more targeted tax base and a reduced rate of 3%. These changes are designed to help the new law comply with constitutional requirements. The newly covered digital services include:
- Software-as-a-Service (SaaS) platforms
- Digital content delivery for commercial use
- Cloud storage and data processing
- Online publishing platforms
The new tax has significant implications for multinational enterprises that either operate in Maryland or provide digital services to customers in the state. Affected companies will need to evaluate:
- Adjustments to pricing and invoicing structures
- Updates to tax collection and billing software
- Economic nexus thresholds and registration obligations
- Service delivery configurations that might trigger tax liability
Businesses delivering digital services into Maryland without a physical presence may still be required to collect and remit the tax if they meet applicable revenue or transaction thresholds.
Digital Ad Tax Remains in Place
It is important to note that Maryland’s Digital Advertising Gross Revenues Tax (DAGRT), enacted in 2021, remains in effect and is not affected by the new 3% sales tax. The DAGRT imposes a progressive tax of up to 10% on revenues from digital advertisements served in Maryland. It applies to companies with more than $1 million in Maryland revenue and $100 million in global revenue.
The digital ad tax is still the subject of ongoing federal litigation and remains one of the most controversial digital tax laws in the country. It is seen by many as an attempt to tax large tech companies that have so far avoided direct state-level taxation on advertising revenues.
Broader Implications for State and Global Tax Policy
Maryland’s revised tax could become a model for other U.S. states that are seeking to tap into the growing digital services sector without triggering legal challenges. Currently, more than 40 U.S. states tax some form of digital goods or services. However, Maryland is the first to adopt a reduced rate specifically for digital services, signaling a more measured approach to taxation in the digital economy.
As more states modernize their tax systems, the Maryland framework offers a case study in balancing:
- Legal viability
- Stable revenue generation
- Administrative simplicity
- Policy differentiation between consumer media and commercial digital infrastructure
What International and Out-of-State Companies Should Do
For international and out-of-state digital service providers, Maryland’s tax is not simply a localized change. It is a signal that state-level digital tax policy in the U.S. is becoming more complex and fragmented. Each state may adopt its own:
- Definition of taxable digital services
- Nexus and sourcing standards
- Exemptions or revenue thresholds
Companies should consider:
- Conducting a state-by-state tax exposure assessment
- Recalibrating U.S. indirect tax strategies
- Seeking legal and tax advisory support to mitigate risks and prepare for possible audits
- Reviewing prior collections or refunds tied to Maryland’s former 6% tax that was ruled invalid
Maryland Sets a New Precedent in State-Level Digital Taxation
Maryland’s decision to adopt a 3% digital services tax reflects a strategic compromise between legal caution and fiscal necessity. For international SaaS providers and tech companies, it represents the evolving nature of U.S. state tax enforcement in a digital-first economy.
While legal scrutiny continues, Maryland’s approach may guide future legislation in other jurisdictions looking to modernize their tax systems without provoking constitutional challenges. As the global digital economy grows, such policies are likely to shape the future of subnational taxation in the United States.
How TaxDo Helps Digital Sellers Stay Compliant with Maryland Sales Tax
Navigating Maryland’s sales tax rules can be challenging — especially for out-of-state or international digital sellers. At TaxDo, we specialize in helping digital businesses stay compliant with U.S. state tax laws, including Maryland’s specific sales tax regulations. That way, you can focus on scaling your business without worrying about penalties or audits.
Here’s how TaxDo supports your business in Maryland:
Sales Tax Nexus Assessment in Maryland
We analyze your sales activity to determine whether your business has economic nexus in Maryland — meaning you’re legally required to collect and remit sales tax in the state.
Maryland Sales Tax Registration
If your business meets the nexus thresholds, we’ll help you register with the Comptroller of Maryland and obtain your Maryland Sales and Use Tax License.
Filing Timely Sales Tax Returns
We manage your Maryland sales tax filings accurately and submit them on time to avoid late fees or interest charges. Whether you file monthly, quarterly, or annually, we’ve got you covered.
Secure Sales Tax Remittance
TaxDo handles the remittance of collected sales tax directly to the Maryland tax authority — fast, accurate, and secure.
Real-Time Tax Exemption and Resale Certificate Validation
We help verify exemption certificates for B2B sales in Maryland to reduce liability and ensure your records meet audit standards.
Support During Audits and State Inquiries
If the Maryland Comptroller initiates an audit or sends an inquiry, our team will represent your business, manage documentation, and handle communication on your behalf.
Whether you’re a SaaS provider, e-commerce business, online marketplace, or subscription service, TaxDo is your trusted partner for staying compliant with Maryland’s digital sales tax laws — and beyond.
Simplify your U.S. tax compliance journey.
Contact us today to get started or book a free consultation with our tax specialists