Maryland Just Read \"Processing\" Broadly Enough to Cover a Data Center's Transformers. The Word That Stops You Is \"Resale\"

Key Takeaway: On July 17, 2026 the Supreme Court of Maryland held that a utility's conductors, substations and transformers are used in "processing" electricity and therefore qualify for Maryland's production-activity exemption. The same equipment classes sit in every AI data center in the state. What separates the two is not the hardware, and not physics — it is whether the electricity is resold, and that is the one element the Court expressly did not decide.

What the Court Held

Comptroller of Maryland v. The Potomac Edison Company, No. 12, September Term 2025, was decided July 17, 2026 in an opinion by Gould, J. Maryland exempts from sales and use tax tangible personal property used "directly and predominantly in a production activity." Tax-Gen. § 11-210(b)(1). "Production activity" is defined to include "assembling, manufacturing, processing, or refining tangible personal property for resale," § 11-101(f)(1)(i), and separately "generating electricity for sale or for use in another production activity," § 11-101(f)(1)(ii). Electricity is itself tangible personal property under § 11-101(k)(2)(iii).

Potomac Edison does not generate electricity in Maryland, so clause (ii) was unavailable to it. It argued instead that stepping voltage up for long-distance transport and back down for customer use is "processing" under clause (i). The statute does not define the word, so the Court went to dictionaries contemporaneous with the 1968 enactment: "a series of actions or operations conducing to an end" (Webster's Seventh New Collegiate Dictionary 678 (1963)) and "a systematic series of actions directed to some end" (The Random House Dictionary of the English Language, College Edition 1055 (1968)). Voltage conversion fit.

One detail in the opinion matters more than the result. In footnote 7 the Court refused to read "processing" narrowly for the electric industry alone, observing that the Comptroller never explained how the word could be narrowed for one industry "without also narrowing it for every other industry covered by the exemption."

The taxpayer did not win everything. Foundation support structures — clamps, bolts, brackets — stayed taxable, because they only physically support other components rather than act on the product. Anyone reading this for a data center should note that holding first: the racks and the trays are not coming with you.

Eversheds Sutherland's SALT Shaker covered the decision on September 21 (Charles Capouet), and Blank Rome's Christopher M. Lash wrote it up for the National Law Review on August 20, arguing the Court's "willingness to apply the ordinary dictionary definition of 'processing' without importing a 'substantial transformation' test should encourage other industries to take a fresh look at whether their equipment qualifies."

Maryland Already Has a Data Center Door, and It Has a Price of Admission

Maryland exempts "qualified data center personal property" under Tax-Gen. § 11-239. The Comptroller's Business Tax Tip #28 sets out what that covers, and the list is remarkably close to what Potomac Edison just litigated: "equipment necessary for the generation, transformation, transmission, distribution, or management of electricity, including exterior substations; generators; transformers; unit substations; uninterruptible power supply systems; batteries; power distribution units; and remote power panels." It also covers servers, routers, and the cooling plant, which § 11-210(b)(1) plainly does not.

The catch is the threshold. A "qualified data center" must, within three years of applying, have invested at least $2,000,000 in qualified data center personal property and created at least five qualified positions in a Tier 1 area, or at least $5,000,000 and five qualified positions anywhere else in the state. The operator files with the Maryland Department of Commerce and the Comptroller then issues a certificate.

That is a hyperscaler program. An agent operator with a few racks of inference capacity, and certainly one renting colocation space rather than owning gear, does not clear it. For that operator § 11-239 is not a door at all.

Potomac Edison is the second door, and it has no application, no jobs test, no investment floor and no certificate. It also has a gate the first door does not: the property must be used in processing tangible personal property for resale.

The Element the Court Did Not Decide

Footnote 2 of the opinion is one sentence: "The 'for resale' element in § 11-101(f)(1)(i) is not at issue." Potomac Edison sells the electricity it transforms, so nobody litigated it.

For an AI facility that element is the whole case. Data is not tangible personal property in Maryland; a GPU does not process anything the exemption recognizes. The only candidate is the electricity, and a facility that consumes its own power to produce a service has not resold anything. The transformers do identical work and land on the opposite side of the statute.

There is one configuration where they do not. A colocation or hosting provider that submeters power and rebills it to tenants as a separate line is, on the face of it, buying electricity for resale — the same posture that makes a resale certificate the right instrument on the purchase. A provider that folds power into an all-in rack fee is selling a service and consuming the power itself. Same building, same substation, same physics, and the exemption turns on how the invoice is drawn. Whether Maryland would accept an agent-adjacent resale posture on submetered power is not settled, and nothing in this decision settles it.

Note also that the exemption is about equipment, not the commodity. Business Tax Tip #28 is blunt on the point: "The purchase of electricity by a qualified data center is not exempt from sales and use tax." Winning on transformers does not make your power bill exempt.

The Objection Nobody Answered, and It Points at Us

Killough, J., dissented, and the structural argument is worth reading if you sell compute in Maryland. Section 11-101(m)(11) classifies "a transportation service for transmission, distribution, or delivery of electricity" as a taxable service. The dissent's position is that a scheme cannot tax an activity as a service in one provision and exempt the equipment used to perform it in another, and that the majority never cites § 11-101(m)(11) at all.

Maryland taxes what an AI facility sells. Section 4 of Chapter 604 of the Acts of 2025, effective July 1, 2025, made data and information technology services and software publishing services taxable at 3 percent by reference to 2022 NAICS sectors 518 and 519 and subsectors 5132 and 5415 — and sector 518 is, in the Comptroller's own words in Technical Bulletin No. 56, "computing infrastructure providers, data processing, web hosting, and related services."

So an operator claiming § 11-210(b)(1) on its power plant is claiming a production-activity exemption for equipment that produces an expressly taxable service. That is the dissent's objection in its purest form, and the majority's silence leaves it live.

What Our Engine Prices, and What It Does Not

None of this changes an AgentTax calculation, and the reason is worth stating plainly. Probing our Maryland rules at $1,000 in ZIP 21201, business-to-business returns $30.00 on compute, API access, storage, cloud infrastructure, data processing, SaaS, AI model access, subscriptions and generic services, and $60.00 on data purchases, digital goods and licences. Consumer sales return $60.00 on the digital-service categories while the data-processing categories hold at $30.00. That is the 3 percent technology-services rate against the 6 percent general rate, and it is correct.

What the engine prices is the sale of your output. Potomac Edison is about the tax on your inputs — the equipment you buy to run the facility. That is an exemption you claim on a purchase, with a certificate or a refund claim, not something a transaction API computes. We are not treating this as an engine gap, because it is not one. The practical value here is a refund question: § 13-1104(g)'s four-year limitations period is the general rule for sales and use tax refund claims, and the Court held the 30-day window in § 13-508(a) is a narrow exception for refunds of assessed tax.

What to Watch

The case was remanded to the Appellate Court of Maryland, so the record is not closed. Watch for whether the Comptroller issues guidance narrowing Potomac Edison to utilities, which footnote 7 makes awkward but not impossible. And watch whether anyone puts the dissent's § 11-101(m)(11) argument to a court in a technology-services posture, because the answer decides whether a Maryland AI facility has one door or two.

Check your own Maryland exposure on the output side. Run a Maryland calculation with no account, or get a free API key and keep the audit trail. See how Maryland treats SaaS today, what the 3 percent tech tax has actually collected, the parallel fight over data center electricity in Virginia and the federal bills trying to define an AI facility; every state is in the 50-state SaaS taxability guide and the AI agent sales tax hub.

This analysis is for informational purposes only and does not constitute legal or tax advice. This post reflects AgentTax's current interpretation of evolving law. Consult a licensed tax professional for compliance decisions.