FAQ
The Comptroller's office is drafting the regulations for the new law that will go into effect July 1. We are providing them with information and questions we would like them to address. Below, the Maryland Chamber’s State Taxation Consultant Karen Syrylo, CPA has attempted to answer some frequently asked questions as best she can given what we know now. If you’d like to submit a question, email it to techtaxquestions@mdchamber.org.
- 1. What services are impacted by the computer services sales tax?
The following services are listed within the bill:- Computer facilities management and operation.
- Custom programming.
- Computer system planning and design that integrate computer hardware, software, and communication technologies.
- Computer disaster recovery.
- Data processing, storage and recovery.
- Hardware or software installation or maintenance, and repair.
- To view the enacted language, click here.
- 2. When does the computer services sales tax take effect?
The computer services sales tax will take effect July 1, 2008. - 3. Will there be an exemption for services provided after July 1 under contracts that were entered into before that date? Many computer services projects take months or years to fulfill, so there will be many unfinished contracts in place that had not contemplated this tax.
The general application of effective date changes is for sales made on or after the new date, and usually pre-existing contracts are considered sales made prior to the new date. There was no specific “grandfather” clause in the new law. This issue is on our list for the Comptroller’s Office for clarification. - 4. Do other states tax computer services?
There are 10 states that apply some level of taxation to computer services. Tax rates and the definition of “computer services” vary widely. The list includes states where the sales tax or gross receipts tax is applied to all services, as well as states who specifically list taxable “computer services.” The rates vary from 0.307 percent to 7 percent. For a complete overview, click here. - 5. Must my company charge Maryland tax on computer services we perform for customers outside the State of Maryland?
The current direction is that the service will be taxable at the delivery point, not where the person is located when he performs the service. We have to try to analogize where is the place of delivery of a computer service to where is the delivery of an item of property, which is going to be one of the complex issues. In general, the idea is that the computer service is taxable at the location of the computer upon which a service is performed or where is a software program received. So, services delivered entirely outside of Maryland would not be subject to Maryland tax, and custom software that is sent to the client’s non-Maryland location would not be subject to Maryland tax. - 6. Are services performed by non-Maryland companies for Maryland customers subject to Maryland sales tax?
See item 5. above. Services performed by a non-Maryland service provider for computers/clients that are located in Maryland are subject to the Maryland tax. If the service provider has “nexus” with Maryland because they have an office in Maryland or because their employees or contractors or sales representatives come into the state, then the non-Maryland seller must charge the Maryland tax to its customer and remit it to the Comptroller. If the non-Maryland service provider does not charge the tax to its Maryland customer, then the customer is required to self assess the tax and remit it directly to the Comptroller. - 7. Do individuals who do not have official businesses have to collect the tax (for example, I am an individual non-employee consultant who receives a 1099-MISC from my clients for my charges to them)?
In general, even individuals who make taxable sales will need to open a sales tax account with the Comptroller and set up processes for charging the tax to their customers and remitting the sales tax to the Comptroller with sales tax returns. There is no exemption for individual sellers under even the current sales tax law. An exclusion in current law only provides that a taxable sale “does not include a transaction whereby an employee performs a service for the employee’s employer.” We are providing feedback to the Comptroller’s office that many computer consultants are 1099 individual contractors rather than employees or business enterprises. - 8. Aren’t federal government contractors exempt from the sales tax?
No, and yes; it depends!
The general rules of sales taxes will apply here, resulting in many transactions being taxable:- The business that is providing services directly to the government, say the prime contractor, does not have to charge sales tax to its government customer because the federal government’s purchases are exempt from state sales tax.
- However, any of the purchases that the prime contractor makes in providing its service to the government can be subjected to sales tax, unless some other exemption exists (more on that in a minute). Under a U.S. Supreme Court decision U.S. v. New Mexico, sales tax is allowed to apply to items purchased by a government contractor because they are not purchases by the government itself. This is true even though the entity ultimately using the item or ultimately paying for the item is the government. Therefore, subcontractors and vendors selling services and items to the prime contractor will have to charge sales tax to the prime contractor if those items are delivered in Maryland and if the subcontractor has nexus in Maryland. If the subcontractor does not have nexus and does not charge sales tax to the prime contractor, then the prime contractor would have to self assess the use tax if the service items were delivered in Maryland.
- An exemption exists in the current Maryland sales tax statute, as an exclusion from the definition of a taxable “retail sale,” for the “sale of a taxable service if the buyer intends to resell the taxable service in the form that the buyer receives or is to receive the service.” The issue is determining the facts of the transactions and in what cases the prime contractor is buying computer services that it will resell in the same form (therefore the subcontractor/vendor need not charge tax) versus in what cases the computer services will not be sold in the same form and therefore are taxable. This is on our list for the Comptroller’s Office.
- If the service is delivered to a location outside of Maryland, the Maryland sales tax won’t even apply (based on current expectation of the state’s sourcing rules).
- 9. Will I have to charge the sales tax on computer services I perform for nonprofit entities?
Some aspects of services related to websites may be classified as “computer services” because the services that are delivered involve the software and hardware platforms. Other services may not be computer services, because, for example, they involve only the artistic design and appearance of the web pages and not the mechanical operations themselves. The statute lists exclusion only for internet access, probably interpreted as the ISP connection service only. The entire category of services related to websites is on our list for the Comptroller’s Office. - 10. Does the computer services sales tax apply to web design?
We’re not sure at this point. A website is not generally thought of as part of the “computer system” of hardware and software, nor is it typically thought of as “data processing.” And web designing is entirely different from the designing and programming of software. In addition to web design services, other services would include the frequent updating a website requires. Yet, a website is accessible only through computers. The statute lists exclusion only for internet access. The entire category of services related to websites is on our list for the Comptroller’s Office. - 11. Reading the language in the law, it seems that computer programming that is provided for business management and other professional services reasons is specifically excluded, is that right?
The new law’s language provides that the taxable services do not include a computer service “that is provided as part of or in connection with” a list of other services including banking transactions, business management services, educational, legal, accounting and telecommunications services. The interpretation of “as part of or in connection with” phrase, as well as the definitions of the other services will have to be provided by the Comptroller’s Office. We are submitting specific questions and issues to them. - 12. What if I am a subcontractor providing computer services to my client who in turn provides computer services to his client – can I accept a resale exemption certificate from my client, since he will be charging sales tax to his client?
Maybe, maybe not. An exemption exists in the current Maryland sales tax statute, as an exclusion from the definition of a taxable “retail sale,” for the “sale of a taxable service if the buyer intends to resell the taxable service in the form that the buyer receives or is to receive the service.” The issue is determining the facts of the transactions, and in what cases is the prime contractor buying computer services that it will resell in the same form (therefore the subcontractor/vendor need not charge tax) versus in what cases are the computer services not sold in the same form and therefore the subcontractor must charge tax. This is on our list for the Comptroller’s Office for clarifying when computer services are considered to be resold in the same form. - 13. If the services I provide include both taxable and nontaxable services, does this new law make all of my charges subject to the sales tax?
No, as long as you separately state in your billings to your clients the services that are taxable computer services and those that are not taxable. By segregating the different categories you are allowed to charge tax on only the taxable items.
