Maryland becomes first state in the nation to tax digital advertising

On Feb. 12, 2021, the Maryland Senate joined the state House of Delegates in overriding Gov. Larry Hogan’s 2020 veto of House Bill 732, creating a first-in-the nation ‘digital advertising gross revenues tax’ on certain digital advertising revenue derived from Maryland. Recall that the democratically-controlled legislature overwhelmingly approved the bill at the end of the regular session in mid-March 2020. At that time, Gov. Hogan’s veto message explained that the bill would raise taxes and fees on residents during a time of financial uncertainty due to the COVID-19 pandemic. 

How the digital advertising tax works 

The digital advertising gross revenues tax is imposed on persons with global annual gross revenues of at least $100,000,000 deriving gross revenues from digital advertising in Maryland of at least $1,000,000. Tax rates varied from 2.5% to 10% depending on the taxpayer’s global annual gross revenue. The bill defines ‘digital advertising services’ as advertisement services on a digital interface, e.g., software, websites or applications, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising and comparable advertising services. It is anticipated that the Maryland Comptroller will promulgate regulations to determine the state from which revenues from digital advertising are derived.

Controversy and potential challenges 

The tax was immediately controversial when introduced. Initial criticism included concern of the broad definition of ‘digital advertising,’ while other criticism focused on the burden of the tax falling on smaller purchasers of digital advertising from large digital advertisers subject to the tax. Finally, many policy groups questioned whether the tax ran afoul of the Internet Tax Freedom Act, a prohibition on discriminatory taxes on electronic commerce, because the tax singled out digital advertising. 

Takeaways

The intense scrutiny that the digital advertising tax faced from the business community and tax advocacy organizations is likely to continue with legal challenges not unlikely. Impacted businesses are cautioned to follow any developments further amending the tax or legal challenges that could enjoin its enforcement. The veto override was not itself without controversy as it was reported that some legislators were considering changes to the bill in lieu of an override. There are also other pending proposals introduced this year that would make further changes to the new tax. 

Other states have recently considered a similar tax. In the last year, at least the District of Columbia, Nebraska, Montana, New York and Washington have either discussed or proposed to tax digital advertising. Digital advertising taxes is one mechanism states are likely to turn to digital taxes to cover shortfalls due to reduced tax collections because of the pandemic. Understanding how sales and use taxes apply to your sale or purchase of digital goods and services will be increasingly important during the COVID-19 recovery.