Key points covered in this article:

  • New 3% Tax on Tech Services: Maryland now imposes a 3% tax on certain technology and information services, including software publishing and IT consulting, impacting many businesses statewide.

  • Higher Taxes for Wealthy Individuals: The law increases income tax rates for high earners and adds a 2% capital gains surtax for individuals with high federal adjusted gross income.

  • Expanded Excise and Sales Taxes: Additional revenue measures include higher excise taxes on vehicles, cannabis, and sports betting, along with new taxes on short-term rentals and vending machine sales.

On July 1, several tax changes took effect under the Budget Reconciliation and Financing Act of 2025, a 200-page law signed by Governor Wes Moore on May 20. The legislation introduces a 3% tax on certain technology and information services, raises income tax rates for high earners, adds a 2% capital gains surtax, and increases several excise taxes and fees. The law is expected to generate approximately $2 billion in fiscal year 2026 and is part of a broader effort to address a projected $3 billion budget gap. Most provisions apply to tax years beginning after December 31, 2024.

Background

Maryland has depended on a mix of personal income and sales taxes to fund state programs. In addition to the state income tax, residents usually pay local income taxes based on county. The state also charges a 6% sales tax on most retail goods and some services.

But for years, many digital services, including cloud computing and software support, were not included in Maryland’s sales tax. Lawmakers had tried to introduce a “tech tax” before, but earlier proposals faced legal and political challenges. Instead, this bill takes a more comprehensive approach. It expands the tax base across a few areas and uses a traditional sales tax model, which is thought to be more likely to withstand legal scrutiny and remain in place long term.

Key Changes Effective July 1, 2025

Below is an overview of the most significant changes now in effect or scheduled to take place in the coming year.

New 3% Tax on Tech and IT Services

As of July 1, Maryland is now taxing some technology-related services at a 3% rate. The new tax applies to four categories defined by NAICS federal industry codes. These include:

  • 5132 – Software publishing
  • 518 – Data processing, hosting, and related infrastructure
  • 519 – Information services, such as news syndicates and internet publishing
  • 5415 – Computer systems design and related services, including IT consulting

These types of services have become central to businesses across industries, but they had not been subject to Maryland’s sales tax until now. Lawmakers say the goal is to bring the tax code more in line with today’s digital economy. The new tax is expected to generate about $480 million in the first year.

Some exceptions apply. Certain cybersecurity and quantum tech firms are excluded, along with organizations operating in higher education innovation zones. In addition, contracts signed before July 1 may remain exempt, although any major updates or renewals could trigger tax liability.

With the new rules in place, many companies are reassessing service categories and determining whether they need to register to collect and remit the tax. For example, a Maryland-based company providing cloud-based data storages may now need to charge sales tax on monthly service fees, even if these services were not taxed previously.

Anticipating the need for clarification, the Comptroller recently released a technical bulletin to address some common questions and answers. More guidance is expected in the coming months.

Higher Income Tax Rates for Top Earners

Beginning with the 2025 tax year, Maryland has added two new brackets for high-income earners. Both were previously taxed at 5.75%. Now, the law states:

  • A 6.25% state income tax rate applies to taxable income greater than $500,000 for individual filers and $600,000 for joint filers
  • A 6.5% rate applies to income exceeding $1 million for individual filers or $1.2 million for joint filers

In addition, the maximum local income tax rate has increased from 3.2% to 3.3%, which raises the effective tax burden for those in higher brackets. Taxpayers in this group may want to reevaluate their estimated payments, withholding strategies, and timing of income.

Capital Gains Surtax

Maryland also introduced a 2% surtax on capital gains for taxpayers with federal adjusted gross income above $350,000. The surtax is calculated separately from the standard income tax and is intended to apply to investment income without affecting sales of business assets or equipment.

Certain gains, such as those tied to Section 179 property, are excluded. Taxpayers expecting large capital transactions in the near term will want to consult with a tax advisor to determine how the new rule may apply.

Pass-Through Entity Tax (PTET)

The final bill includes a PTET amendment that would, starting in 2026, allow resident members of pass-through entities to calculate Maryland tax based on their full distributive income. However, this language was added late in the process and is expected to be revised before implementation, particularly to avoid complications for S corporations.

Excise and Fee Increases

Several other taxes and fees also increased on July 1. Key items include:

  • Vehicle excise tax increased from 6% to 6.5%
  • Cannabis sales tax increased from 9% to 12%
  • Sports betting tax increased from 15% to 20%
  • Short-term vehicle rentals taxed at 3.5% (new)
  • Vending machine sales taxed at 6% (new)

Next Steps for Businesses and Individuals

For businesses, especially those in the tech and professional services industries, now is the time to review service offerings, contracts, and invoicing systems with a tax professional. It may be necessary to register for Maryland sales tax collection, determine taxes of certain services, and apply for exemptions, if applicable. If a tech service is used across state lines, businesses can often use a Multiple Points of Use certificate to make sure the sales tax is applied correctly across locations.

For high-income individuals, the new income tax brackets and capital gains surtax may require updates to estimated tax payments, withholding elections, and investment strategies. Proactive planning can help mitigate surprises.

For all taxpayers, the Maryland Comptroller’s Office is expected to issue additional guidance and regulations. Staying informed and maintaining communication with tax professionals will be key.

Conclusion

The new rules have implications for businesses, high-income households, and investors, particularly those in technology, consulting, and other service sectors. With proper planning and awareness, taxpayers can adapt to the new environment and ensure compliance moving forward. For more information on tax planning, contact PBMares Tax Partners Charles Dean Smith, Jr. and Ryan Paul.