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STATE & LOCAL TAXES

element between the buyer and the digital product. The revised guidance nontaxability, such as where the software
instructor or other buyers; also provides that a monthly charge for requires “substantial configuration” to
■ A live seminar, discussion, or similar either satellite radio or satellite television operate as intended. The same software
event hosted by a not-for-profit service is not subject to the sales and functionality is deemed taxable where it
organization or business association use tax. involves “a simpler software plan geared
that features an interactive element Observation: At the same time, to individuals or a limited number of
between the buyer and host or other certain categories from the original users in Maryland that does not require
buyers; and guidance remain and elaborate on the configuration to use.”
■ A professional service obtained statutory language. For example, the Observation: While the examples
electronically or delivered through guidance provides that a digital prod- reflect the “custom software” amend-
the use of technology having uct includes “a chat room, discussion, ments in the legislation, they merely
electrical, digital, magnetic, wireless, weblog, or any other venue that permits offer conclusory statements that either
optical, electromagnetic, or similar users to communicate electronically in “substantial” configuration is required
capabilities. real time.” Therefore, from the begin- or no configuration is required. These
Second, it amended the exclusion ning, the guidance appears to take the simplified scenarios may not provide
under existing law (not part of the digi- position that a digital product includes adequate guidance for taxpayers seeking
tal products legislation enacted earlier in electronic communications. Most states to apply the general concepts of software
the year) for “custom computer software have not directly addressed these types taxability to their specific facts.
services.” The amendments specify that of products and services other than
this exclusion applies: seeking to tax them as software and The legislation’s effective date
■ To “custom computer software, not as digital goods; including them in Another area of uncertainty initially was
regardless of the method transferred its definition of digital goods is unique that the legislation and the original Tax
or accessed, or a service relating to to Maryland. Tip #29 were silent regarding software
custom computer software.” and digital goods that are accessed or
■ If the custom computer software is Custom computer software used in multiple locations. Upon request
created for use by a specific person or Regarding custom computer software, by the business community, the guidance
contains standard or proprietary rou- the revised guidance provides that was revised. The revised guidance pro-
tines “requiring” significant creative customized, configured, or modified vides that if the vendor receives a written
input to customize, “configure, or software “is software that does not statement from the buyer at the time of
modify” the procedures and programs operate immediately as required by sale, the vendor “may charge Maryland
“that are necessary to perform the the buyer (i.e., ‘out of the box’) and sales and use tax based on the percentage
functions required for the software to includes enterprise software.” Software of use in Maryland.”
operate as intended.” as a service (SaaS) is taxable under the However, the guidance does not
In response, the Maryland Comp- comptroller’s interpretation unless the allow purchasers to remit use tax based
troller’s Office revised Tax Tip #29 to exclusion for customized software ap- on their in-state use (such as by issuing
incorporate the legislative changes.6 plies. Because the taxation of electroni- a multiple-points-of-use exemption
The revised guidance deleted the cally delivered software and SaaS was certificate) but instead requires sellers to
“non-exclusive list of [taxable] digital not clearly identified in the enacting collect tax based on written representa-
products” from the earlier guidance legislation, extension of the sales tax to tions from the purchaser (or, without
and stated that otherwise nontaxable these items caught many businesses by such representations, under the general
services do not become taxable services surprise and makes the interpretation sourcing hierarchy). The revised guid-
merely because they involve delivery of a and application of the “customized ance also provides that a buyer may
digital product. For example, the revised software” exclusion critical. file a refund claim if a vendor is unable
guidance recognizes that a contract The revised guidance includes a to charge Maryland sales and use tax
with an advertising agency may involve long list of business software uses that based on a percentage of total sales and
components of both nontaxable services might qualify for the customized soft- clearly states that a vendor’s obligation
and the production of a product that is ware exclusion and 11 examples. The to charge and collect tax is not waived
either tangible personal property or a examples provide clear-cut statements of under these circumstances.

6. Maryland Comptroller’s Office, Business Tax Tip #29, “Sales of Digital Prod- Insight, “Maryland Updates Digital Products Sales Tax Guidance” (July 30,
ucts and Digital Codes” (updated June 3 and July 14, 2021). See PwC’s 2021), for details.

40 March 2022 The Tax Adviser