Maryland's Tech Tax Collected $35 Million Against a $500 Million Estimate. Here's What That Means.
Maryland's 3% sales tax on information technology and data services — enacted as part of the state's fiscal year 2026 budget and effective July 1, 2025 — was projected to generate approximately $500 million in its first year. Through the first half of the fiscal year, actual collections came in at roughly $35 million. The Maryland Board of Revenue Estimates has since revised the full-year projection down to approximately $110 million, a 78% shortfall from the original estimate. Fiscal year 2027 projections have also been cut, from $609 million to around $220 million.
This is one of the most significant developments in state digital services taxation in recent memory, and every SaaS company, AI service provider, and digital commerce operator should be paying attention.
What Maryland Taxed
The tax applies at a 3% rate to services classified under the 2022 North American Industrial Classification System (NAICS) sectors 518 and 519 and subsectors 5132 and 5415. In practical terms, that covers cloud storage and application hosting (think AWS, Google Cloud, Azure), web hosting and server management, data backup and storage, video streaming infrastructure, application software publishing, and a wide range of data processing and information services.
For AI agent operators, this is directly relevant. If you are selling compute services, data processing, or hosted AI inference in Maryland, this tax almost certainly applies to your transactions. Maryland's engine treatment in the AgentTax tax policy registry reflects a settled B2B rate of 3% and B2C rate of 6% across digital categories, based on the NAICS 518/519 classification authority from July 2025.
The tax comes with a narrow exemption for qualified research and development activities conducted in partnership with the University of Maryland's Applied Research Laboratory. There is no general B2B exemption.
Why Collections Fell Short
The precise reasons for the revenue gap remain uncertain, but several theories have emerged.
Behavioral adjustment. Approximately 2,900 companies filed under the new tax, with roughly half being first-time sales tax filers. That number is lower than the state's modeling assumed. Some businesses appear to have restructured operations — routing work through out-of-state entities or shifting where services are delivered from — to avoid triggering the tax. This is legal tax planning, and it is exactly what happens when a single state imposes a targeted digital services levy without neighboring states following suit.
Compliance lag. A new tax category, especially one as broad as "information technology services," requires businesses to identify whether their specific offerings fall within scope, update billing systems, register with the state, and begin collecting. For companies that were not previously Maryland sales tax filers, that ramp-up takes time. Some of the shortfall may simply reflect delayed compliance rather than permanent avoidance.
Classification ambiguity. The NAICS-based definition is broad, but businesses and their tax advisors are actively working to determine whether specific services fall within or outside the enumerated categories. When a tax classification is new and untested, the initial period always produces uncertainty about scope. That uncertainty suppresses early collections.
Overestimated base. Revenue estimators may have overestimated the taxable base by assuming a static economy — that the same volume and type of IT services would continue to be purchased in Maryland regardless of the tax. In reality, digital services are among the most geographically flexible transactions in the economy. A company buying cloud compute from a Maryland-based provider can, in many cases, restructure that purchase to source it differently.
What This Means for Digital Services Taxation
Maryland's experience is a case study that every state legislature considering digital services taxation should examine carefully. Several lessons are already clear.
Digital services are mobile. Unlike physical retail, which is anchored to a storefront, digital service delivery can often be restructured to change where the taxable event occurs. States that tax digital services unilaterally — without a regional or multistate framework — may find that the tax base is smaller than projected because economic activity shifts across borders. This is not a new phenomenon, but the magnitude of Maryland's shortfall quantifies it in a way that prior estimates did not.
Compliance infrastructure matters. When a state imposes a new category of sales tax, especially one covering services that were previously untaxed, the compliance infrastructure does not materialize overnight. Businesses need time to determine applicability, update systems, register, and begin collecting. Revenue estimates that assume full compliance from day one will always overshoot in the early periods.
The AI and cloud economy complicates sourcing. For AI service providers in particular, the question of where a transaction is sourced — where the seller is located, where the buyer is located, where the compute runs, where the data resides — is a live compliance question. Maryland's destination-sourcing rules mean the buyer's location controls, but for B2B cloud transactions where the buyer's "location" might be a corporate headquarters in one state consuming services delivered from data centers in three others, the sourcing analysis is not simple.
Revenue dependency on tech taxes is risky. Maryland built its fiscal 2026 budget on the assumption of $500 million from this tax. When that revenue failed to materialize, it contributed to a projected shortfall that compounds into a $3 billion gap in the following fiscal year. States that treat digital services taxes as major revenue pillars are taking on substantial fiscal risk if collections do not match models.
What AI Agent Operators Should Do
If you operate AI agents or sell digital services with any Maryland nexus, the compliance obligation is real regardless of the revenue shortfall. The tax is law. Collection is mandatory. That roughly half of the 2,900 filers are new to Maryland sales tax should tell you something: companies are registering and collecting, even if the total base is smaller than the state expected.
Specifically, verify whether your services fall within NAICS sectors 518, 519, subsectors 5132, or 5415. If you sell cloud compute, data processing, hosted software, or AI inference services to Maryland buyers, you likely have a collection obligation. The AgentTax engine handles Maryland at the correct 3% B2B / 6% B2C rates with full confidence. If you have not yet configured Maryland in your nexus settings, now is the time to evaluate your exposure.
For operators watching other states, keep an eye on which legislatures are tracking Maryland's experience. A revenue shortfall of this magnitude will either discourage other states from pursuing similar taxes — or, conversely, prompt them to draft broader, harder-to-avoid versions. Both outcomes affect your forward-looking compliance posture.
What to Watch Next
Maryland's fiscal 2027 revised estimate of $220 million (down from $609 million) suggests the state expects collections to roughly double as compliance matures, but still fall well short of original projections. Whether that trajectory holds will depend on enforcement actions, further guidance from the Maryland Comptroller, and whether businesses that restructured to avoid the tax maintain those new arrangements or revert as the compliance landscape settles.
Other states to watch: Rhode Island has proposed a 10% digital advertising tax (separate from sales tax, but part of the same policy trend), and several states including Georgia, Kansas, Pennsylvania, and Wyoming are considering sales tax base expansions that could include digital services. Washington's SB 5814, which expanded the state's digital services tax classification, hits its April 1 contract transition deadline in two days.
The broader question is whether state-by-state digital services taxation is sustainable as a revenue strategy, or whether the mobility of digital commerce will ultimately force a multistate or federal framework. Maryland's first nine months of data suggest the former is harder than legislators anticipated.
This analysis is for informational purposes only and does not constitute legal or tax advice. Consult a licensed tax professional for compliance decisions.