The 3 percent tax on data and information technology services in the fiscal year 2026 budget, which will include large cloud computing services like those from Amazon Web Services, is one way the state is addressing this deficit. However, some individuals have raised concerns about the impact of this tax on businesses. Maryland officials argue there will not be a damaging impact on businesses.
The budget legislation passed the House and Senate in April. Two Maryland administration officials discussed the budget on the condition their names not be used.
According to the first Maryland administration official, the IT service taxation concept has been under consideration for years. The state expanded its sales tax to include marketplace facilitators in 2019 and implemented a digital service tax in 2021. For example, cellphone service and mobile data have been taxed in Maryland for years; the official said the change in this budget simply aims to fill in the gaps.
“The particular impetus for this year is that we had a budget deficit of originally less than $3 billion, but as Donald Trump took office and we started to see economic impacts from that, it grew to $3.3 billion,” the first official said.
The 3 percent tax on IT services is not going to close the deficit by itself, the second official said, but rather, is one part of the state’s work to do so. It is expected to generate about $450 million for general fund revenue, which supports state government work including health care and education — which they explained are among the fastest-growing elements of the state budget over the last decade.
In the current economic environment, with higher inflation rates and the impact of new tariffs, Andrey Yushkov, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, said he believes this tax may contribute to inflation.
There are better solutions to address a budget deficit, Yushkov said, including expanding the sales tax base to include final consumption services that are not currently taxable, such as barbershop services. Paired with a slight increase on sales tax, he said this could be a better way to help the state address the budget deficit. He underlined his belief that reasonable approaches to taxing services to expand the sales tax base are those approaches that tax final consumption services. He said this tax structure in Maryland will be an “experiment.”
The second Maryland official argued that this is a tax structure modernization intended to help state law keep the pace with broader economic changes, like the shift over the past century in people buying more services rather than goods.
An example of this is data storage, the first official explained. Whereas one would have once had to purchase a physical hard drive to store data, which would require paying a sales tax, data storage is now done through buying extra space on a platform like Dropbox, for which an individual would traditionally not pay a sales tax.
It’s not the only example of such a tax structure shift. In 2014, Washington, D.C., made a change to require sales and use tax for specific services, such as gym memberships.
And while Belay Technologies President Jake Stokes has said this new taxation may force the business to leave the state, the first state official said the state worked closely with the private sector in creating this proposal and even narrowed its scope from the initial proposal to address concerns that were raised. The biggest impact for businesses, the official said, will likely be that they may have to collect sales tax that they have not had to collect before. Stokes did not immediately respond to a request for comment.
Yushkov noted that the budget is improved from the initial proposal, but there are still concerns on its impact: “It is quite significant because of the proliferation of those digital services.”
There may be an impact to private-sector technology investment in the state, Yushkov said — not from the IT service tax alone, but rather from a comprehensive perspective including the additional capital gains tax and higher tax rate on high earners.
The tax favors out-of-state businesses, according to Yushkov. He said a “clear advantage” for businesses to relocate from Maryland to another state — which he expects will have a greater impact on smaller businesses, as larger businesses can more easily vertically integrate digital services.
“We don’t think it will have a deleterious effect on business,” the first official said. On the contrary, they argued that the educational and infrastructure services this tax will support are part of the competitive advantages that attract businesses to Maryland.
The second official also emphasized that this tax is not on businesses, but rather, on people who purchase things in Maryland; if a business crosses the state border to Virginia but their customers are still located in Maryland, they must still collect the tax.
Yushkov also raised a concern about the potential for tax pyramiding, which occurs when the same final good or service is taxed multiple times along the production process, potentially creating transparency issues for consumers. The first official said the scope of this tax is narrow enough that they are not significantly concerned about this issue.
Maryland is not the only jurisdiction to apply such a tax on digital services, as a similar approach has been taken in Washington, D.C.; Ohio; and Texas.
As the first state official said, Marylanders demand high levels of service from their government, and they said constituents understand that this requires investment.
“This is attempting to fill in holes,” said the second official. “It is making sure that the system is rounded out and treating this more equitably and efficiently.”
