New B2B and Digital Taxes Are on the Table in Maryland

While Governor Moore’s tax plan is still being fiercely debated in Maryland, legislators have introduced several additional proposals—mostly aimed at increasing taxes on businesses—to generate revenue and address the state’s chronic budget deficit. These proposals include introducing a 2.5 percent business-to-business (B2B) services taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (H.B. 1554 and S.B. 1045) and a data broker gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” tax (H.B. 1089 and S.B. 904), along with a renewed attempt to implement worldwide combined reporting within the state’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. system (part of the Fair Share for Maryland Act of 2025, H.B. 1014 and S.B. 859).

B2B Services Tax

Under the proposal introduced by Senator Hettleman (S.B. 1045) and Delegate Moon (H.B. 1554), the updated definition of taxable services would explicitly include the following B2B services (where both the service provider and the buyer must be business entities): accounting and payroll, office support, data and IT services, consulting, photography and design, landscaping and repairs, tax preparation, asset management, and other services. The tax rate for these B2B services would be 2.5 percent—lower than the general 6 percent rate currently applied to final consumption goods and services as well as some business inputs. While sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. proposals have been common across states in recent years, no successful legislation has explicitly targeted only B2B services.

The services that would be taxed under the proposal, moreover, are exempt virtually everywhere else: for instance, only New Mexico, which has a hybrid sales/gross receipts taxGross receipts taxes are applied to a company’s gross sales, without deductions for a firm’s business expenses, like compensation, costs of goods sold, and overhead costs. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding. , and South Dakota, which has an unusually broad-based sales tax which already extends to many business inputs, tax accounting or consulting services under their sales tax. Asset management is an even more surprising inclusion.

Taxing B2B services or business inputs, as we pointed out in our recent guide for policymakers, violates the principles of neutrality and transparency. It leads to tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. (where effective sales tax rates exceed statutory rates), disguises the true cost of government for taxpayers, shifts the sales tax closer to a tax on production (akin to gross receipts taxes, which often have lower statutory rates), distorts economic decisions regarding capital investment and production processes, and disadvantages smaller in-state firms with fewer opportunities for vertical integration compared to their out-of-state competitors.

While this tax would likely bring in significant revenues (from $944 million in FY 2026 to $1.4 billion in FY 2023, according to the fiscal note), it would come at the cost of higher prices, higher effective sales tax rates, and the majority of the burden being borne by final consumers in the state. According to a report by COST and EY, the business share of the sales tax in Maryland was already about 42 percent as of 2017, which is the average across states. Under this proposal, this share would increase significantly, making Maryland less competitive for both existing and new businesses. Exempting business inputs under the existing sales tax (which, unlike a value-added tax, is a single-stage tax with no credits for business purchases along the value chain) is the preferred option if legislators aim to make the sales tax more neutral and transparent.

Data Broker Gross Income Tax

Another proposal (H.B. 1089 and S.B. 904) would impose a 6 percent tax on data brokers’ gross income. Under a set of assumptions, state revenues may increase by $90 million-$100 million in FY 2027-2030. Importantly, the bills earmark revenues for several special funds, including the Coordinated Community Supports Partnership Fund, the Blueprint for Maryland’s Future Fund, and several smaller funds focused on privacy protection, digital literacy, and AI projects.

The primary vehicle for achieving the goals of data privacy and online security in the bill, the Privacy Protection and Enforcement Unit in the Office of the Attorney General, would receive only 0.75 percent of the tax proceeds (or $2.5 million, whichever is greater). No revenues are expected to be generated for the state’s general fund, which implies that the bill is not considered primarily a revenue-raising tool to cover the existing budget gap. The tax would add another layer of business input taxation, as data brokers provide most of their services to other corporations, not final consumers. The ultimate cost of this bill will be at least partly borne by Maryland taxpayers who consume digital and physical goods purchased from the clients of data brokers.

As pointed out by COST, the data broker tax would be a double tax on affected businesses, as they are already subject to the state’s corporate income tax. Introducing a second layer of taxation for a specific industry lacks clear economic justification and moves Maryland closer to states like Delaware, Oregon, and Tennessee, which impose both the corporate income tax and the gross receipts tax, reducing their tax competitiveness.

Worldwide Combined Reporting

The Fair Share for Maryland Act of 2025 (H.B. 1014 and S.B. 859) modifies several elements of Governor Moore’s proposal by making them more progressive, including the proposal to increase the top marginal income tax rate to 7 percent, and reintroduces mandatory worldwide combined reporting starting in 2029. Notably, if this bill is passed, Maryland would become the first state to require worldwide combined reporting for all corporations that form unitary groups. (Similar ideas circulated in Minnesota, New Hampshire, and a number of other states, but none succeeded.) A similar proposal was introduced in Maryland last year (see our detailed review here) but was not included in the final version of the budget bill.

As we have noted previously, worldwide combined reporting at the state level has serious flaws and cannot be considered sound tax policy. It adds complexity to the state corporate income tax system and increases transaction costs for in-state corporations. It yields double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. for a significant number of payers because it attempts to superimpose the U.S. state system of formulary apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. over the separate accounting systems used by the rest of the world. Other payers, however, may benefit if they have lower (or negative) net income elsewhere. Its revenue effects are ambiguous and may even turn out to be negative (the fiscal note for H.B. 1014 does not provide disaggregated revenue effects of worldwide combined reporting), especially when the average profitability of foreign subsidiaries is lower than that of domestic corporations.

Conclusion

Addressing a projected $3 billion budget deficit in fiscal year 2026 is an important task for Maryland’s legislative and executive branches. Starting with spending cuts, as proposed by Governor Moore, is a responsible way forward. Finding the right revenue raisers for the remaining part of the budget gap is a complicated task, but Maryland still has an opportunity to do so using policy instruments that are broad, growth-neutral, and transparent. For instance, moderately increasing the sales tax rate (currently at 6 percent) and broadening the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to include final consumption services may be one such policy. Instead, legislators have recently proposed focusing on taxing business inputs and increasing the complexity of their corporate tax code, which could be detrimental to the state’s tax competitiveness and lead to various behavioral effects that are not conducive to economic growth.

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