States Continue the Push to Impose Sales Tax on Electronic Services

Within the past year, Maryland expanded its sales and use tax to certain online services. The Maryland statute includes within the definition of “taxable services”, certain services that are described in various North American Industrial Classification System (NAICS) codes. Such NAICS codes include descriptions of (i) Data Processing, Hosting and Related Services, (ii) Other Information Services, (iii) Software Publishers, and (iv) Computer Systems Design. Maryland’s revenue agency, the Maryland Comptroller, has interpreted these provisions to extend sales and use tax to such services as “automated data processing”, “data entry”, data processing computer services”, “data processing (except payroll services, financial transaction processing services”, “web search portals” and “electronic data processing”. Taxpayers who may be subject to these provisions should closely compare the NAICS definitions with the Maryland Comptroller’s interpretation when evaluating the potential taxation of their services since the NAICS codes were not created for purposes of providing sales and use tax definitions. It should also be pointed out that the tax rate on these newly taxed services is 3%. Maryland’s sales and use tax rate on most items, however, is 6%.

Conclusion / key takeaway / recommendation

Businesses engaged in providing and delivering services over the internet should remain vigilant regarding their state sales and use tax obligations. The universe of states imposing sales tax on electronically delivered services is expanding, as are the types of transactions subject to tax. Service providers should not assume that transactions which were previously untaxed, remain exempt. Such an assumption could result in substantial state tax liabilities if a vendor of online services fails to properly consider or apply tax to customer invoices.