2025-2026 Maryland Budget: Major Tax Provisions

On April 7, 2025, the Maryland legislature passed the $67 billion budget for the 2026 fiscal year. The budget will raise $1.6 billion in new revenue through a combination of new taxes and fees, making this the largest tax increase in Maryland history. One of the most notable changes is the inclusion of a 3% tax on information technology services, personal income tax changes and excise tax increases.

Key Tax Provisions in the Maryland Budget

Below are key tax provisions that taxpayers should be aware of:

Sales Tax on Data and IT Services

The final legislation includes a new 3% sales tax on data and information technology that went into effect on July 1, 2025. This tax, commonly referred to as the “tech tax,” includes data or information technology services and system software publishing services that fall under the following North American Industry Classification System (NAICS) Sectors:

• NAICS Sector 518 – Computing Infrastructure Providers, Data Processing, Web Hosting and Related Services
  • Cloud storage and application hosting, such as Google Drive, Dropbox and iCloud
  • Web hosting services (except software publishing)
  • Streaming support services (except streaming distribution services)
  • Data backup and computer data storage services
• NAICS Sector 519 – Web Search Portals, Libraries, Archives and Other Information Services
  • Web search portals and online directories, such as Google
  • Digital and physical libraries, archives and bookmobiles
  • Reference libraries and research databases
• NAICS Sector 5415 – Computer Systems Design and Related Services
  • Website and software development services
  • IT consulting and cybersecurity solutions
  • Search engine optimization (SEO) and digital marketing technology
  • Robotics and artificial intelligence (AI) software design and support
  • Computer disaster recovery and data security services
  • Software installation and systems integration
• NAICS Sector 5132 – Software Publishing
  • Software and application development companies
  • Video game design and publishing
  • Business software providers, such as Microsoft and Adobe
  • Customer enterprise solutions

Transactions will either be subject to the 3% tech tax or Maryland’s 6% sales tax, not both. The Comptroller of Maryland recently issued regulations about the new sales tax, which we will outline in more detail under a separate article.

Personal Income Tax Changes

For tax years beginning after December 31, 2024, the following personal income tax changes will take effect:

New Capital Gains Tax

Any individuals earning over $350,000 annually will have to pay an additional 2% tax on capital gains. The legislation excludes gains from certain asset sales and exchanges, including residential properties, specific deferred plans, retirement accounts and business property with costs deductible under IRC Section 179.

Higher Personal Income Tax Rates

High-earning taxpayers with income between $500,000 and $1 million will be taxed at 6.25%, and taxpayers with incomes over $1 million will be taxed at 6.5%.  Previously, personal income tax rates in Maryland peaked at 5.75%.

Increased Standard Deduction & Itemized Deduction Caps

While the standard deduction will increase and continue to increase for future cost-of-living adjustments, itemized deduction caps will apply to taxpayers’ earnings over $200,000. A phase-out rate of 7.5% will be applied to the portion of federal adjusted gross income (AGI) exceeding $200,000 to determine the maximum allowable deduction.

Pass-Through Entity Tax Amendment

The pass-through entity amendment states that a pass-through entity electing to pay tax on behalf of all its members must calculate resident member tax liability based on the pass-through entity’s total income, including both in-state and out-of-state earnings. For non-resident members, the tax must be calculated based only on the pass-through entity’s Maryland apportioned income.

This amendment may cause conflict for S-corporations, as it is viewed as a special allocation, which could endanger the federal S-election. The implementation date is set for July 1, 2026, to allow time to resolve this issue.

Sales Tax Refund Interest Rate Amendment

The sales tax refund interest rate amendment modifies the annual interest rate to the then-current prime rate, to be paid on sales and use tax refunds resulting from a final decision under the Potomac Edison case, which involved the manufacturing equipment sales tax exemption.

Other Increases from the Maryland Budget

In addition to key tax provisions, below are some additional highlights in the 2025-2026 budget that will become effective on July 1, 2025:

• The vehicle excise tax will increase from 6% to 6.5%.
• The vehicle emission inspection fee will increase from $14 to $30.
• A new 3.5% excise tax will be applied to rental vehicles.
• A new tire fee of $5 per tire will be implemented.
• The cannabis sales tax will increase from 9% to 12%.
• The sports betting tax will increase from 15% to 20%.
• All vending machine goods will be subject to a 6% sales tax.

If you have any questions on how Maryland’s fiscal year budget will affect you, please contact a Brown Plus advisor.

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