Your Guide to Maryland Sales and Use Tax

Effective financial planning requires knowledge of tax laws and your potential tax obligations each year, whether you run a business or are just concerned with individual tax requirements. In Maryland, this includes the sales and use tax—required on purchases made in the state or those made out of state for goods being used in Maryland. 

Businesses must be familiar with these laws to ensure they collect and file sales tax by the applicable deadlines, which can be frequent. It’s also important to understand how sales and use tax differ. This guide walks through everything to know about Maryland sales and use tax requirements.

What Is the Maryland Sales and Use Tax?

Sales tax is the tax imposed on any eligible goods or services purchased in the state of Maryland. The use tax is the tax imposed on goods purchased outside of Maryland but used in the state. 

Maryland businesses must collect a 6% sales tax on taxable purchases, as well as a 9% tax on alcoholic beverages. The same percentages apply to the use tax on out-of-state purchases for goods used in Maryland. 

Sales tax applies to a range of goods, personal property, and services. Examples are food, clothing, electronics, furniture, equipment, appliances, books, art, event admissions, and certain types of repairs.

The Maryland Comptroller states that the use tax is meant to protect Maryland-based businesses against unfair competition. For example, if someone living in Maryland could avoid tax completely on a purchase made in another state, it could hurt Maryland-based businesses.

Sales Tax versus Use Tax in Maryland

A business that sells taxable goods in Maryland must charge the sales tax. The use tax similarly applies to purchases from another state when the products are used in Maryland. This applies to orders made online, in person, or over the phone. 

Note that an outside business is only required to collect Maryland’s sales tax if they send enough products or services to Maryland to qualify for nexus or if they have a physical location there. 

Maryland State Sales and Use Tax Rates

The 6% sales tax applies to most purchased goods and services in Maryland. However, there are a few other types of products with different rates:

• Alcoholic beverages, both packaged and served: 9%
• Car rentals: 11.5%
• Recreational vehicle rentals: 11.5%
• Truck rentals: 8%

Fortunately, Maryland businesses only have to worry about these state-wide rates. Maryland doesn’t collect local state tax, so there isn’t an additional rate for your city or county.

How Do You Register for Maryland Sales and Use Tax?

Like many other states, Maryland requires businesses to have a sales and use tax license when selling qualifying products or services. The state offers a simple application online through the Maryland Tax Connect portal (found here). This is also the place where state businesses pay taxes, view their tax history, register a business, or apply for exemption certificates for sales and use tax.

What Is Nexus in Maryland?

Nexus generally refers to a business or taxpayer that meets state requirements for being taxed by that state. While nexus was once determined more by a business having a physical presence in a state, with all the online sales going on, nexus can also be based on whether a business has an economic presence there. 

In Maryland, nexus means a business conducts its activities in the state, and both physical and economic presence can be used to determine nexus. The government provides these examples of situations that would establish nexus:

• Having a business location in Maryland, such as an office
• Owning or using property in the state, including rental office space or equipment used for manufacturing or distribution for the business
• Accepting and soliciting business orders through employees in Maryland
• Creating products in Maryland
• Keeping inventory in Maryland, including in a public warehouse or with a distributor
• Representatives collecting on accounts in the state
• Providing training or technical help through business personnel after a sale
• Repairing or replacing products in Maryland
• Running mobile storefronts in Maryland, such as trucks with mobile salesman
• Selling more than $100,000 to Maryland residents or more than 200 transactions for the year.

If you qualify for having nexus in Maryland, you will need to set up a plan for collecting and reporting sales tax to the state. Talk to your tax attorney or accountant if you have questions.

Who Must Collect Sales Tax in Maryland? 

The first step is understanding nexus in Maryland. Then, evaluate if you meet the other requirements for collecting sales tax. 

A business must collect sales tax if:

• They are registered in Maryland
• They make over $100,000 in state sales or 200 transactions for this year or last year 

These businesses and anyone “who engages in the business of an out-of-state vendor” must also file sales and use tax returns in the state of Maryland, according to the Maryland Comptroller’s website.

While many exempt organizations like nonprofits still have to collect and file sales tax, there are a few exemptions in Maryland, including certain sales by churches or religious organizations, some magazine subscription sales to Maryland schools, and certain food sales that support veterans or local departments like the fire department or rescue squad.

How to Report and Pay Sales Tax in Maryland

When you file a sales and use tax return, the sales tax is remitted on that return. This tax must be collected by you upon the sale of qualifying goods and services in Maryland. You may file your individual or business tax return via physical documents or electronically. Remember that your business must be registered with Maryland to file returns and pay business taxes.

For use tax, you have a few other requirements to know. If you make an applicable purchase outside the state and need to pay the use tax, you need to file a Consumer Use Tax Return with payment by the applicable deadline. Failing to do so could lead to penalties. 

This form and payment should be sent to this address:

Revenue Administration Division
110 Carroll Street
Annapolis, MD 21411

Businesses that collect at least $15,000 in sales tax in one year need to file their tax returns monthly by the 20th of the month following the month of sales. For example, March's sales tax return is due April 20th. Otherwise, filing is done quarterly. Here are the deadlines for reporting sales tax in Maryland:

• Purchases made in January through March: April 20 due date
• Purchases made April through June: July 20 due date
• Purchases made July through September: October 20 due date
• Purchases made October through December: January 20 due date

These same deadlines also apply to filing the use tax form. 

If you miss these due dates, penalty and interest charges are likely. The next section discusses these potential penalties and how they work. Working with a tax expert will help you ensure you’re following all applicable requirements.

Penalties for Missing Sales and Use Tax Deadlines

After you fail to report by the deadline, whether filing your tax return or paying what you owe, you will receive a first notice from the state. The Comptroller’s website states that if you don’t respond to that notice, you’ll then receive an assessment notice. This will outline your penalty and interest charges. You have 30 days to dispute what’s due through an appeal, and after 30 days, collection begins. 

The penalty amount will be based on what you owe, up to 25% of your unpaid amount. Interest rates are 9% for 2023 and 10.0075% for 2024.

If you still ignore notices and don’t pay what you owe plus penalties and interest, the state could take legal action against you, such as issuing a lien on your property. In certain situations, the state may waive penalties and interest if you can provide reasonable cause for the issue and you are up-to-date with your tax filings.

What If You Can't Afford to Pay Sales Tax in Full

In some cases, the state may allow you to set up a payment plan on your sales tax liability, but you will incur penalties. Generally, you must be able to pay off the balance within six months to qualify. The state also allows qualifying taxpayers to get offers in compromise on sales tax, but typically, with a tax collected from consumers like the sales tax, you have to meet extremely strict requirements to qualify, and you may not be able to continue operating your business. 

Consequences of Not Paying Sales and Use Tax

If you don't pay your sales tax, your business will incur penalties. The Comptroller's Office may also issue tax liens against you and seize your business and/or personal assets. Failure to pay sales and use tax may also cause the Motor Vehicle Authority to put a hold on your record so that you will not be able to renew your Maryland driver's license or vehicle registration(s). 

 

How Does a Maryland Sales Tax Audit Work?

In Maryland, tax returns could be audited at random or because the information you provided was triggered by reviewers. Some audits that you could face include income tax for your business, employer withholding, or sales and use tax audits. 

Here are the progressive steps in the general process the Comptroller’s Office uses for tax audits in Maryland:

1. First Contact

You will be contacted over the phone or via a letter about an audit. If these methods don’t work, an auditor will come to your place of business for scheduling. Make sure the auditor shows you their identification, verifying they are an auditor with the Maryland Comptroller’s Office. 

This is also when the auditor will ask you more broad questions about your business, and you’ll schedule a time to start the audit so you can have documentation ready.

2. The Audit Begins

You’ll usually have a meeting with an auditor where you’ll go into more detail about the business and how it operates. They will review how you collect taxes or your tax management processes to ensure compliance. Carefully comply with any requests they make about showing required documents and providing detailed explanations. Be as open and honest as possible.

The auditor will review everything in detail to understand the tax situation and whether or not your tax return was accurate. The time frame for audits will vary based on each situation.

3. Results of the Audit

Then, the auditor will provide something called “working papers,” which outline their findings. They will also hold a meeting with you to close out the audit and explain the situation. Before you sign an acknowledgment of the results, make sure you fully understand what was found and what your responsibility is. 

For example, you could now face a tax assessment from the state. However, the audit could have successfully confirmed all of your information is correct and compliant. 

4. Pay the Assessment or Appeal

After the audit, if everything is agreeable and reasonable to you, go ahead and pay the assessment you owe or take the necessary steps to keep your business in compliance. 

However, if you don’t agree with the auditor’s results or you feel they’re being unreasonable, your first step is contacting the auditor’s supervisor, according to the Comptroller’s office. Baltimore-area residents can call 410-767-1501, and residents outside Baltimore can call 800-492-1752.

You can also file an appeal if you disagree with an audit’s results. The first step will be an administrative hearing, and if that doesn’t solve the problem, you’ll appeal to the state’s tax court.

What If You Should Have Collected Sales Tax but Didn’t?

Many business owners may overlook a sales or use tax requirement. The law can be complicated, especially for small or new businesses. 

The state of Maryland does offer an option if you haven’t collected sales tax, but you should have. The voluntary disclosure agreement (VDA) program allows you to report and pay your past due tax liability. 

You do this on a voluntary basis, so you aren’t eligible if the state has already contacted you about your missed taxes or you’re under an audit. You can’t have any current tax liability on your account for the applicable type of tax to qualify. Additionally, you must have $500 or more in taxes or fees due within the lookback period, which is four years.

Participation in this program is kept confidential, and it can apply to all types of taxes and fees in Maryland. You can either send in your VDA request via mail or email your request to [email protected]. This is typically sent by your tax attorney or accountant.

If your VDA request is approved, you won’t have to file sales and use tax returns for the applicable four years, but you’ll need to provide information about your sales information and sales tax collected and owed. 

Getting Help with Maryland Sales Tax Problems

The first step to sales and use tax compliance is understanding state laws and what you’re required to do. Keeping detailed records all year is an important way to ensure your tax information is organized in the event you have to deal with a sales tax audit. 

Sales and use tax requirements can be complicated and overwhelming for individuals and businesses alike. It’s always wise to work with a tax professional, whether an attorney or CPA, who can explain your obligations and help you stay compliant. 

Explore TaxCure to find local sales tax experts who can help walk you through state laws and complex business requirements.