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The Maryland legislature enacted the Budget Reconciliation and Financing Act of 2025 (House Bill 352) during its recently concluded spring session as the state attempts to address an estimated $3 billion budget deficit for fiscal year 2026. The bill that emerged from the conference committee differs in several significant regards from the versions approved earlier in the House and Senate.

The most significant aspect the bill for businesses is the imposition of a new 3 percent tax on certain data and information technology services as well as system software and application software publishing services. The new tax impositions are tied to business establishments that fall within sectors of 518, 519, 5415, and 5132 of the North American Industrial Classification System (NAICS) manual, as follows:

• Sector 518 includes establishments primarily engaged in providing computing infrastructure, data processing services, web hosting services, and other related services.
• Section 519 includes establishments primarily engaged in operating web search portals and information services, as well as establishments primarily engaged in providing library or archive services.
• Sector 5415 includes establishments primarily engaged in providing expertise in the field of information technologies through the writing, modifying, testing, and supporting of software to meet the needs of a particular customer; planning and designing computer systems that integrate computer hardware, software, and communication technologies; on-site management and operation of clientsâ€� computer systems and/or data processing facilities; and other professional and technical computer-related advice and services.
• Section 5132 includes establishments primarily engaged in software publishing.

If of the sales and use tax applies to any tangible personal property, digital code, digital product, or service that is also subject to the new 3 percent tax, the higher rate will apply to the sale. The bill also eliminates a sales and use tax exemption for custom computer software and custom computer software-related services. The conference committee added two exemptions to the new 3 percent tax.  First, it exempts sales of cloud computing to a qualified cybersecurity business.  Second, the bill exempts certain sales to a qualified company located in an emerging technology development area made in connection with the work of the company, or by a qualified company located in an emerging technology development area.

The bill also creates an option for buyers of digital codes, digital products, or services subject to the 3 percent tax to present vendors with a certificate indicating the products will be available for concurrent use in multiple jurisdictions. The buyer must know at the time of purchase that the items purchased will be concurrently available for use in more than one taxing jurisdiction or resold in its original form to a member of an affiliated group or a related pass-through entity of which the buyer is also a member. The buyer must deliver to the vendor the multiple points of use certificate at the time of purchase.  Subsequently, the vendor is relieved of the obligation to collect or remit tax to the Comptroller, and the buyer is required to assume that obligation.  To apportion the tax, the buyer may use any reasonable, but consistent and uniform method, that is supported by the buyer’s records as they exist at the time of the sale and accurately reflect the primary use location in the state.

The bill also made substantial changes to the Maryland personal income tax. Notably, however, the conference committee deleted a provision that would have required worldwide combined reporting for corporation income tax purposes. now heads to the Governor for signature.  If approved, the sales and use tax provisions of the bill take effect on July 1, 2025.  For questions about House Bill 352, please contact Jeremy Jester.

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A Massachusetts appellate court recently upheld taxation of a nonresident on gains from the sale of stock in a company he founded while residing in Massachusetts. In 2005, the taxpayer co-founded a Massachusetts corporation and received 50 percent of the corporation’s common stock. The taxpayer served as CEO and Treasurer of the corporation until 2015; although he reportedly worked approximately 80 hours per week until 2009, he reported only minimal income in those years. The taxpayer left his role with the company in 2015, and sold his shares shortly thereafter. Although the taxpayer had been a resident of Massachusetts during his time with the company, he moved to another state shortly after leaving the company (and before the sale of his shares). For 2015, the taxpayer filed a Massachusetts nonresident/part-year resident return and did not report gain from the sale as Massachusetts source-income. On audit, the Massachusetts Department of Revenue (Department) took the position that gain from the sale should be allocated to Massachusetts; following a protest, the Board of Tax Appeals agreed with the Department.

Massachusetts law permits the Commissioner of Revenue (Commissioner) to tax income “derived from or effectively connected with any [Massachusetts] trade or business.� A 2003 amendment defined this phrase to include income derived from the sale of an interest in a business and added language stating that the Commissioner may tax Massachusetts-source income regardless of the year it which it was earned. Although Department regulations provide that income from a trade or business may include income resulting from the sale of a business interest, the rule “generally does not apply� to the sale of shares of stock in a corporation if that income is characterized as capital gains for federal income tax purposes The rule, however, will apply if such income is treated as compensation for federal income tax purposes. The taxpayer argued that because income from the sale was characterized as capital gains for federal purposes, it could not be treated as Massachusetts-source income.

The court rejected the contention that federal characterization was binding, noting that the rule merely stated that federal capital gains would “generally� not be subject to tax if received by a nonresident. Instead, the court ruled that a nonresident’s gains from the sale of stock could be treated as Massachusetts-source income if “the stock is related to the taxpayer’s compensation for services.� Because the taxpayer acquired the stock with the expectation that it would be worth more in the future and was “looking forward to the payout from his hard work� for the company, there was ample evidence that the gain from the sale of shares was derived from his employment. For questions about , please contact Nikhil Sequeira.

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The Washington State Department of Revenue (Department) recently issued an Excise Tax Advisory (ETA) providing guidance on application of the Multiple Points of Use (MPU) sales tax exemption to software maintenance agreements. Maintenance agreements typically require software vendors to provide technical support and updates for existing software products. They often include a mix of taxable products (e.g., software updates) and nontaxable services (e.g., help desk support). The Department terms such agreements as Mixed Element Software Maintenance Agreements (MESMAs). The ETA explains that retail sales tax generally applies to MEMSAs when prices are not state separately for various products and services, unless the retail-taxable portion of the agreement is minimal (10 percent or less of the total purchase price), in which case the retail sales tax may not apply.

The MPU exemption offers a retail sales tax exemption on the non-Washington portion of specific products that are concurrently available for use at multiple locations, both inside and outside Washington. Products eligible for MPU treatment include digital goods, prewritten software, remotely accessed prewritten computer software, digital automated services, and digital codes. For a MESMA to qualify for the MPU exemption, it must meet the following criteria: (1) the MESMA must include one or more MPU-eligible products that are concurrently available for use inside and outside Washington; (2) the non-retail taxable products must relate to the MPU-eligible products, for example by providing support, maintenance, or improvements for such products; and (3) the MESMA must not contain any retail-taxable products other than the MPU-eligible products available for concurrent use. Note that non-retail taxable products in a MESMA are considered to “relate� to an MPU-eligible product only if the non-retail taxable products provide support, maintenance, or improvements to the MPU-eligible products. The advisory provides illustrative examples to clarify these criteria. For instance, a qualifying MESMA might include updates for prewritten software used concurrently in multiple locations and related help desk support. Conversely, a MESMA that includes prewritten software updates and unrelated hardware support does not qualify for use of the MPU.

To claim the MPU exemption, businesses should provide the seller with a completed Digital Products and Remote Access Software Exemption Certificate demonstrating the concurrent use of MPU-eligible products inside and outside Washington. This documentation will also be used to support the use tax apportionment calculation based on the users of the MPU-eligible products of the MESMA in Washington compared to users of the MPU-eligible products everywhere. Contact Michele Baisler for more information on  .ÌýÌý

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On March 24, 2025, the Washington State Department of Revenue (Department) adopted to update its approach to unclaimed property audits. These regulations establish a comprehensive framework for audits, including clear guidelines on when estimation can be used to determine a business’s unclaimed property liability. Under the rules, estimation is permissible only with explicit written consent from the business or if the business fails to provide access to its records. Further, the Department will now be empowered to issue administrative subpoenas and pursue judicial enforcement to require the production of records. These rules also permit the Department to engage third-party contingent-fee auditors for unclaimed property examinations. A contingent fee may not exceed 10 percent. In addition, the rules offer businesses a mechanism to address concerns during audits, such as unreasonable or unauthorized requests and delays, by enabling them to seek Department intervention for remedial action.

To further ensure clarity of the audit process, the new rules outline the audit procedure in three distinct phases: (a) An opening conference to outline the processing and period covered by the audit; (b) A records request and initial examination in which the unclaimed property holder is required to respond to the requested documents within 30 days, unless extended by the examiner. After issuance of the initial exam report, a holder has 90 days to provide additional records and information; and (c) A final report that is required to provide certain information will be issued. The holder may request an informal conference to protest the results and may seek an administrative hearing if desired.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø will monitor the situation as the new rules are implemented and as any related state guidance is issued. For more information please contact: Will King, Marion Acord, Ryan Hagerty, Keela Ross, Karen Anderson, or Quin Moore.

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