Maryland Creates New Sales Tech Tax, Increases Income Tax Rates

On April 7, 2025, Maryland passed the Budget Reconciliation and Financing Act of 2025 (House Bill No. 352), making several significant tax changes effective during 2025 and 2026. Specifically, HB 352 will impact many Maryland taxpayers through the creation of a new sales tax on specified technology services and increased personal income tax rates.

New Maryland Technology Services Sales Tax

Effective July 1, 2025, Maryland will expand its sales tax base by targeting services in the technology sector, a new area of tax for the state. The new “Tech Tax” is imposed at 3% on data and information technology services associated with certain NAICS codes from the 2022 edition. This is expected to impact a broad number of business-to-business technology services. Taxable services subject to the new Tech Tax will not be subject to the regular 6% sales tax. Thus, Maryland transactions — including some that were previously exempt from any sales tax — may now be subject to the 3% reduced rate or the 6% regular rate, but not both.

What Does HB 352 Define as Taxable Technology Services?

• NAICS Code 5132
  • System software
  • Application software publishing services
• NAICS Codes 518, 519 and 5415:
  • Data processing
  • Information technology services
  • Computer systems design

However, note a taxpayer’s primary NAICS Sector does not determine taxability for the Maryland Tech Tax. Taxpayers must review the NAICS business activity descriptions within the 2022 edition to know if their services are subject to the Maryland Tech Tax.

Visit www.census.gov/naics for NAICS code descriptions.

HB 352 also authorizes purchasers to issue a multiple points of use exemption when services are used at multiple locations. If this occurs, the sales tax collection responsibility shifts from the seller to the purchaser.

Increased Maryland Personal Income Tax

Maryland’s personal income tax changes are retroactive back to tax years beginning after December 31, 2024. The state made the following changes for the 2025 tax year and beyond:

Increased Graduated Tax Rates

• Maryland income tax
  • > $500,000 single ($600,000 married filing jointly): Tax rate increases from 5.75% to 6.25%
  • > $1 million single ($1.2 million married filing jointly): Tax rate increases from 5.75% to 6.5%
• Local maximum tax rate increased from 3.2% to 3.3%
  • Local Rates will range from 2.25% to 3.3%

New Capital Gains Surcharge

• 2% surcharge on qualifying capital gains when a taxpayer’s federal adjusted gross income (AGI) is > $350,000
• HB 352 exempts several types of assets, including gains on the sale of:
  • Primary residence (when sold for $1.5 million or less)
  • Trade or business property deductible pursuant to IRC Section 179
  • Certain retirement accounts and defined contribution plans, among others

Itemized Deduction Phase-Out

• When federal AGI is > $200,000 single ($100,00 married filing jointly), eligible itemized deductions reduced by a 7.5% phase-out rate applied to the amount of federal AGI > $200,000
  • For example, when a taxpayer’s federal AGI is $300,000, the taxpayer will be required to reduce their itemized deductions by $7,500 (7.5% x $100,000) for Maryland personal income tax purposes.

Standard Deduction Increase

• 25% Maryland standard deduction increase in 2025 and an annual cost of living adjustment to the Maryland standard deduction will be available beginning in 2026
  • Single: $3,350
  • Married filing jointly: $6,700

Maryland Pass-Through Entity Tax (PTET)

Maryland also made several changes to PTET laws taking effect July 1, 2026, and applicable to tax years beginning after December 31, 2025.

• Beginning in 2026, Maryland will allow electing pass-through entities to calculate a resident owner’s PTET liability on all their taxable income; a nonresident owner’s liability will continue to be based on apportioned income.
• However, it is anticipated these rules will be amended before their effective date to require that S Corporations continue to calculate Maryland PTET on the apportioned income of resident owners. This is to avoid any special allocations or a risk of a second class of stock by the S Corporation.
• Thus, only resident owners of partnerships, or LLCs taxed as partnerships, will likely see their 2026 Maryland PTET applied to entire distributable income.

Maryland Fees and Excise Changes

Maryland will also increase rates for the following, effective July 1, 2025:

• Vehicle excise tax: From 6% to 6.5%
• New short-term vehicle rental tax: 3.5%
• Cannabis sales tax: From 9% to 12%
• Sports betting tax: From 15% to 20%
• New tire fee: $5 per tire
• Vehicle emissions inspection fee: From $14 to $30
• Extend 6% sales tax on vending machine sales

Next Steps for Taxpayers

While many states have looked for opportunities to reduce personal income tax rates on their residents in recent years, Maryland’s budget calls for significant tax increases for residents and nonresidents with business operations within the state. Taxpayers with capital gains and federal AGI in excess of $350,000 could now see their Maryland personal income tax rates increase to as much as 11.8%. Nonresidents included on Maryland composite and PTET tax returns will also see an income tax rate increase from 8% to 8.75%, plus an additional 2% surcharge on qualifying capital gains.

Further surprising is the retroactive nature of the personal income tax changes. Taxpayers that sold all or a portion of their business during the first and second quarters of 2025 may owe additional taxes they did not originally contemplate as part of the transaction terms.

Businesses and their owners should closely evaluate how Maryland HB 352 will impact their 2025 tax liabilities. Taxpayers have a very limited window to understand the various sales tax and excise tax changes — effective in merely weeks on July 1, 2025. It will be important to monitor guidance as it is issued by the Maryland taxing authorities, with initial guidance anticipated in June 2025.

Contact Hannah Prengler or a member of your service team to discuss this topic further.

In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.