By Samuel B. Philipson, CPA, JD
Maryland Governor Wes Moore recently signed the Budget Reconciliation and Financing Act (BRFA) of 2025 into law. This legislation will bring significant tax changes for businesses providing certain technology services, as well as to high-income taxpayers.
The following are some of the key points in the budget from a tax perspective.
Personal Income Tax
Under the BRFA, high-income individuals face increased taxes, including new tax brackets, surtaxes and phaseouts of deductions.
Income Tax Rate Changes- Two new state tax brackets were created:
- Individuals with taxable income between $500,001 and $1,000,000 will be taxed at the top rate of 6.25%, an increase of .5%.
- Individuals with taxable income over $1,000,000 will be taxed at the top rate of 6.5%, an increase of .75%.
- For married couples filing jointly, these new rates start at $600,001 and $1,200,001, respectively.
- Local jurisdictions are also authorized to increase their piggyback tax rate from a maximum of 3.2% to 3.3%.
- The BRFA establishes an additional 2% surtax on the net capital gains of taxpayers with federal adjusted gross income in excess of $350,000 —regardless of their filing status.
- The surtax will apply to tax years beginning after December 31, 2024.
- The surtax exempts capital gains from the sale of property used in a trade or business subject to deduction under IRC section 179. Implementation guidance is expected in this area.
- Taxpayers whose Federal Adjusted Gross Income exceeds $200,000 ($100,000 for married individuals filing separately) will have their itemized deductions reduced by 7.5% of the income exceeding that threshold.
Pass-through Entity Tax (PTET) Calculation
The BFRA changed the definition of taxable income for resident members in calculating the PTET. Specifically, there is no addback of the PTET that was deducted for federal tax purposes. Guidance is being developed on how this change will be implemented on returns; we will provide updates as needed when this guidance is released.
Sales and Use Taxes (“Tech Tax”)
Effective on July 1, 2025, Maryland will introduce a 3% sales and use tax, commonly called a “tech tax,” on certain information technology and data services. Maryland will tax data processing, hosting and related services; other information services; computer systems design and related services; and system software or application software publishing services.
It should be noted that software as a service (SaaS) is subject to this tax. Under existing law, SaaS is excluded from the state’s 6% sales tax if used in an enterprise environment solely for commercial purposes, but that exclusion does not seem to apply to the tech tax. Under draft regulations issued May 29, SaaS transactions not previously eligible for exclusion will continue to be subject to the 6% tax, while previously excluded SaaS sales will be subject to the 3% tax.
The tech tax will not be imposed in addition to the state’s existing 6% sales tax. Sales of digital codes or products will continue to be taxed only at the standard sales and use rate.
If the service has multiple points of use, the seller may issue a certificate to the buyer which shifts responsibility for remittance of the tax to the buyer.
The draft regulations provide that periodic payments received after July 1 related to licenses/contracts for some software services will be treated as a separate sale subject to tax even if the initial transaction occurred before July 1.
Stay tuned for an update upon issuance of the final regulations.
Contact Us
If you have questions related to the BRFA or need assistance with state tax issues generally, contact your PKF O’Connor Davies client service team or:
Samuel B. Philipson, CPA, JD
Partner
sphilipson@pkfod.com
Steven J. Eller, CPA, JD
Partner
seller@pkfod.com
Nicholas Rochedieu, JD
Partner
nrochedieu@pkfod.com