This article explains what sales and use taxes are, who must pay them, and how to file them with the state.
What is sales tax?
Sales tax is a state tax on the purchase of most tangible personal property and on some services in Maryland. Tangible personal property is property that can be physically touched, manufactured, and moved. In Maryland, it also includes electricity, natural gas, and the right to stay/rent a room (such as a hotel room). Read the Law: Md. Code Ann., Tax-General §11-101(k)
What is use tax?
Use tax applies when a purchase of tangible personal property is made outside the state of Maryland. If the individual makes an out-of-state, tax-free purchase, he or she must file a Consumer Use Tax Return within three months of the purchase.
Throughout this article, we will use the term “goods” to mean tangible personal property.
What do Sales and Use Taxes Apply To?
Products subject to sales and use taxes
All goods are subject to sales and use tax. This includes food, clothing, jewellery, vehicles, furniture, and art. However, there are some exceptions, such as the following:
- Agricultural Products – Items sold/bought are not taxed if they are bought by a farmer and are being used for an agricultural purpose. Read the Law: Md. Code Ann., Tax-General §11-201
- Food Sales – Food items that are sold by a substantial grocery or market business for consumption off the premises is not considered taxable prepared food. However, food items that are prepared for consumption on the grocer’s premises or are packaged for carry out are considered prepared food and are subject to a 6% sales tax. Read the Law: Md. Code Ann., Tax-General §11-206
Services subject to sales and use taxes
Only services listed in the law are subject to sales and use taxes in Maryland. These services include, but are not limited to:
- Manufacturing or producing personal property;
- Transportation of electricity or natural gas;
- Commercial cleaning and janitorial services;
- Certain telecommunications services;
- Credit reporting;
- Security services; and
- The privilege to drink wine that has not been bought from a restaurant, club or hotel.
Read the Law: Md. Code Ann., Tax-General § 11-101
Rates
The state taxes various goods and services at different rates. A 6% tax rate applies to most goods and services. However, vehicle rentals and the sale of alcoholic beverages are taxed at different rates.
Car and recreational vehicle rentals are taxed at 11.5%. Truck rentals are taxed at 8%.
Sales of alcoholic beverages are taxed at 9%. This applies to sales of packaged alcoholic beverages as well as beverages served for immediate use.
Read the Law: Md. Code Ann., Tax-General §11-104
Who is Responsible for Collecting and Filing Sales and Use Taxes?
The vendor must collect and file sales tax. A vendor is a person in the retail business, who sells finished goods to consumers. Anyone who sells taxable services to consumers must also collect and file sales tax.
Read the Law: Md. Code Ann., Tax-General §11-701
Use tax must be filed by any consumer who makes a tax-free purchase in another state.
Who is Exempt from Sales and Use Taxes?
Sales to an exempt organization
When selling to certain organizations, vendors do not have to collect sales tax. Exempt organizations include cemetery companies; credit unions; veterans groups; volunteer fire, ambulance, and rescue companies; and various non-profit organizations located in Maryland. Before making a purchase, an exempt organization must give the vendor an exemption certificate. To obtain an exemption certificate, an organization must apply to the Comptroller of Maryland.
Read the Law: Md. Code Ann., Tax-General §11-408(a)
Sales by an organization
Generally, even an exempt organization must collect and file sales tax when it sells goods. However, there are certain exemptions. Those exemptions include:
- Sales made by a church or religious organization, when those sales are made for the general purposes of the organization;
- Sales of magazine subscriptions by an elementary or secondary school located in the state of Maryland. Those sales must be made by students, and the proceeds must be used for educational benefits for the school or students;
- Sales of food to support nationally organized and recognized veterans of the armed forces of the United States, as long as the food is served by the members of the organization and the food is consumed on premises; and
- Sales of food to support a volunteer fire department, company, or rescue squad, when the food is served by the department, company, or squad.
For more exemptions, read COMAR 03.06.01.22.
People or organizations that are exempt from paying sales tax on purchases must give the vendor an exemption certificate before the sale. A vendor who sells to an exempt person or organization must keep a record of the certificates.
Read the Law: Md. Code Ann., Tax-General §11-408
Casual and isolated sales
People who do not regularly sell goods or taxable services are exempt from sales and use tax if they meet two conditions. First, the price of the product or service being sold must be less than $1,000. Second, they may not sell through a dealer or an auctioneer.
For example, if an accountant was closing his business and sold his office furniture, he would not have to pay sales and use tax, as long as the furniture was sold for less than $1,000 and no dealer or auctioneer was used to facilitate the sale.
Filing Sales and Use Taxes
Sales tax filing
A vendor who collects $15,000 or more of sales tax in a year, must file returns monthly. The filing is due on the 20th day of the month. However, if the sales tax collected is less than $15,000 in that year, filing may be done quarterly. The taxpayer must complete the filing on the 20th day of the month after the end of each quarter, as follows:
- April 20, for January-March;
- July 20, for April-June;
- October 20, for July-September; and
- January 20, for October-December.
The Comptroller of Maryland may choose to convert a taxpayer from a quarterly filer to a monthly filer. For example, after collecting $3,750.00 in sales taxes for two quarters, or perhaps a greater amount for just one quarter, the Comptroller may direct the taxpayer to file each month. On the other hand, the Comptroller usually does not force a taxpayer to file less often (quarterly instead of monthly.)
Before filing sales tax, the taxpayer must have a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (IRS). (Federal Employer Identification Number Application)
The taxpayer must also submit a Combined Registration Application (CRN) with the Comptroller to receive a sales and use tax license. (Combined Registration Application)
Paper filing
Sales taxes can be filed on paper and mailed to the Comptroller. After a vendor obtains a sales and use tax license, the Comptroller will automatically send the vendor a form to report sales taxes.
Electronic filing
Sales taxes can be filed online through the Comptroller website. To file online, the organization must first set up a bFile account on the site. (Maryland Comptroller website)
The organization must provide gross sales for the period, as well as sales tax due for each tax classification.
Use tax filing
A consumer files the use tax by filling out the Consumer Use Tax for Purchases form.
(Consumer Use Tax Return for Purchases)
Any person who made a tax-free purchase in another state must file this form on the 20th of the month after the end of each quarter, as follows:
- April 20, for January-March;
- July 20, for April-June;
- October 20, for July-September; and
- January 20, for October-December.
Penalties for Late or No Filing
If you file a return late, you must pay two penalty fines. The filing form includes a section to record these fines. The first is a 10% penalty added to the taxes due. The second is an interest penalty of 1.08% per month (or partial month).