MD’s ‘tech tax’ to take effect as new fiscal year begins

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Maryland’s new 3% tax on IT and data services is set to take effect Tuesday, which is the first day of fiscal year 2026.

State Democrats settled on the new tax during the 2025 legislative session as a central part of their plan to generate much-needed revenue amid projections of a roughly $3.3 billion shortfall.

To balance the budget and leave the state with a cash balance, Gov. Wes Moore and the Democrat-led legislature agreed to raise certain taxes and fees to generate about $1.2 billion in general fund revenue and roughly $400 million for transportation projects and services, to cut approximately $1.6 billion in spending, and shift about $800 million in costs to save more money.

Lawmakers expanded the state’s sales and use tax to include certain IT and data services, as defined in the North American Industry Classification System — the standard that federal agencies use to classify businesses.

Among the new taxable categories are software publishing services; computing infrastructure providers, data processing, web hosting and related services; web search portals, libraries, archives and other information services; and computer systems design and related services, according to the state comptroller.

Within these broader categories are services such as cloud storage, cryptocurrency mining, internet search websites, digital archives and mobile applications development and publishing, among many others.

Sales of cloud computing to cybersecurity businesses and sales to or by certain companies in the University of Maryland Discovery District — a public-private research park near College Park that Moore has frequently touted when speaking about his push for Maryland to grow its information technology sector — are exempt from the tax.

In the weeks leading up to the new fiscal year, the Office of the Comptroller has held a series of webinars and offered question-and-answer documents to prepare businesses for the new IT and data services tax and other changes to the tax code that are set to take effect.

Moore signed the new tax into law in May as part of the state budget and budget reconciliation bills for fiscal year 2026.

The tax and fee package is bolstered in large part by the IT and data services tax, but it also includes extensive changes to the state’s income tax requirements — making them more progressive — and a 2% surcharge on capital gains income, among several other measures.

Lawmakers also agreed to adopt a $5 fee for tire purchases, raise the vehicle excise tax from 6% to 6.5%, implement a 3.5% excise tax on short-term vehicle rentals, divert revenue from the 2% capital gains surcharge, double titling fees, accelerate vehicle registration fee increases and raise vehicle emissions inspection fees, among other measures.

The IT and data services tax, which opponents dubbed the “tech tax,” was the most controversial of the Democrats’ tax and fee proposals.

During the session, Moore and top Democrats in the legislature repeatedly pushed back on claims from members of the business community that the tax would hurt the governor’s mission to make Maryland more economically competitive and a hub for technology and similar industries.

The Maryland Chamber of Commerce and other business advocacy groups, as well as state Republicans, centered their opposition on how the new tax would hurt small business and provide a disincentive to companies coming to Maryland, potentially running counter to the governor’s plans for driving growth in the state’s stagnant economy.

The governor, though, has said that companies he’s met with recently are excited about the procurement and permitting reforms that this administration has enacted and proposed. Moore has spoken about how his administration has called out life sciences, IT, and aerospace and defense as “lighthouse industries” for the state, and about recent investments his administration and its partners have made in these industries.