MDComp - Business Tips

Maryland's 6 percent sales and use tax applies to all tangible property that you possess and use in Maryland, no matter where you purchased it. Items purchased out-of-state, either directly or through mail order, a toll-free "800" number, or the Internet are taxable in Maryland to the extent that they were not taxed at the place of purchase.

Is this tax on out-of-state purchases something new?

No. It's been in effect since 1947, when Maryland's sales tax was first imposed. All 45 states which impose a tax on sales also have a companion tax on out-of-state purchases. However, taxpayers tend to be less familiar with the tax on out-of-state purchases than with the tax on local sales.

What kinds of out-of-state purchases are subject to Maryland tax?

Sales and use tax applies to purchases of goods outside of Maryland, including by mail, telephone or over the Internet, if the purchase would have been subject to sales and use tax if made in Maryland.

Some of the most common taxable out-of-state purchases made by businesses are:

Computers
Word processors
Books
Canned computer software
Office supplies
Construction materials
Office furniture
Store fixtures
Cleaning supplies
Copiers

How can I know if a certain purchase is taxable?

There's a simple test: If you would pay tax on the purchase if you made it in Maryland, you should pay tax on the same item if you purchased it untaxed outside of Maryland.

Don't vendors automatically add tax to these purchases?

No. Out-of-state vendors who don't have a place of business or employees in Maryland cannot be required to collect Maryland tax. If the vendor doesn't collect Maryland sales and use tax, you are required to pay it directly to the comptroller.

Out-of-state vendors who do have places of business, employees or sufficient other contacts with Maryland do collect the tax on purchases by Maryland residents, including purchases which are made by telephone, over the Internet or by mail from mail order catalogs.

How do I report out-of-state purchases?

If you have a sales tax license, you should report out-of-state purchases on line 7 of your sales and use tax report.

If you are not licensed, you should call the Taxpayer Service at 410-767-1300 in the Baltimore area, or 1-800-492-1751 from elsewhere in Maryland, and you will be sent the appropriate reporting form. If you make out-of-state purchases regularly, you can be put on the mailing list to receive reporting forms routinely.

How often do I have to report out-of-state purchases?

If your average tax liability for out-of-state purchases is more than $100 per month, you are required to report and remit the tax every month. If your tax liability is less than $100 per month, you may file on a quarterly basis.

What if I pay sales tax to another state?

Maryland grants a credit for sales tax paid to another state up to the amount of Maryland's 6 percent sales and use tax liability.

For example, if you paid a 4 percent sales tax to another state, you would be liable only for the difference, or 2 percent, as Maryland sales and use tax when you brought the property into Maryland.

Do I have to pay tax on used property I bring into Maryland?

Yes. However, you may claim a 10 percent depreciation allowance for each full year you used the property before you brought it to Maryland. Only the depreciated value is subject to tax.

Does the tax apply to self-manufactured goods I bring into Maryland?

The tax applies only to the cost of materials and purchased fabrication services, not to the full market value of the goods. The value of your labor is not taxed.

I entered into a sales contract before January 3, 2008, when the sales increased from 5 percent to 6 percent. What tax rate should I use?

Sales contracts that were entered into prior to January 3, 2008 are taxable at the 5 percent rate. The sales tax applies and must be collected and remitted at the time a sale is made, regardless of the time of payment of the price or time of delivery.

If the sale is made by a vendor located outside of the state of Maryland who is not required to collect the Maryland tax, the use tax is due at the 6 percent rate when possession is taken in Maryland after January 2, 2008. Proper records must be maintained regarding the date and terms of a sale in order to justify collecting at the 5 percent rate where delivery or payment is made after January 2, 2008.

What about lease payments on personal property?

The tax rate due on applicable lease payments for tangible personal property is based on the lease payment period, regardless of the length of the lease or the date that the lease agreement was signed. Each lease payment period is considered to be a separate lease for sales and use tax purposes. Payments for lease periods due after January 3, 2008 will be subject to tax at the 6 percent rate.

Why are out-of-state purchases taxed?

Taxes are imposed on out-of-state purchases to protect Maryland businesses from unfair out-of-state competition as well as to raise revenue. The object is to minimize the occasions on which customers elect to buy from an out-of-state seller solely to avoid the sales and use tax.

How is the tax on out-of-state purchases enforced?

The Comptroller's Office regularly audits sales and use tax licensees as well as service, construction and professional businesses to recover taxes on out-of-state purchases. The Comptroller's Office also collects the tax directly from individuals on more expensive items.

A nexus unit is responsible for discovering unlicensed sellers doing business in the state. If you are concerned about an out-of-state vendor who is actively engaged in business in Maryland and does not collect the sales and use tax where applicable, you may contact the nexus unit at 410-767-1582, Monday - Friday, 8:00 a.m. - 5:00 p.m. EST.