On October 17, 2022, the Anne Arundel County Circuit Court struck down the Maryland Digital Advertising Services Tax. This tax on digital advertising was originally passed by the Maryland General Assembly over the governor’s veto and became effective on March 14, 2021. The Maryland Attorney General has appealed the court’s decision, and the Supreme Court of Maryland will hear the case. The tax has also been challenged separately in federal court.
The Maryland Digital Advertising Services Tax is imposed on companies with annual state digital advertising revenue of $1 million or more. According to the law, “digital advertising” includes “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services,” with “digital interface” defined as “any type of software, including a website, part of a website, or application, that a user is able to access.” The applicable rate is tiered based on a company’s annual global revenue, ranging from 2.5% for revenue greater than $100 million to 10% above $15 billion. The legislation was amended to exclude advertising “on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity,” with “news media entity” defined as entities “engaged primarily in the business of news-gathering, reporting, or publishing articles or commentary news, current events, culture, or other matters of public interest” excluding those that are “primarily an aggregator or republisher of third-party content.” The tax also forbids taxpayers form passing on the tax “by means of a separate fee, surcharge, or line-item.”
As the first of its kind, the likely defeat of Maryland’s digital advertisement tax is a setback for other states in the process of creating their own similar taxes. These efforts include proposed legislation from Louisiana, Montana, New York, Texas, West Virginia, and a recent flurry of bills from Massachusetts. These proposals bear similarities Maryland’s tax and will likely run into the same problems.
According to the Maryland court, the issues with the state’s tax consisted of violations of the Internet Tax Freedom Act (ITFA), the Commerce Clause, and the First and Fourteenth Amendments of the Constitution of the United States. By singling out digital advertisement from other forms that the state does not tax Maryland discriminates against electronic commerce, a violation of the ITFA. The tax was found to violate the Commerce Clause as it imposes a state tax based on global revenue, criteria that includes activity over which the state lacks jurisdiction. The court also agreed that the intent of the tax’s design was to target out-of-state companies whilst excluding those in-state. Finally, the tax was found to violate the First and Fourteenth Amendments by singling out a particular form of speech, digital advertising, for discriminatory treatment through selective taxation.
Another potential issue with the Maryland tax is the possibility of taxpayers indirectly passing it on by raising prices, dodging the prohibition on doing this directly. It may also be difficult to determine whether a particular instance of viewing an advertisement really occurred within the state. Tracking via IP address could be complicated by use of mobile devices and VPNs.
The Maryland tax, and others like it, are effectively designed as taxes on large tech companies including Alphabet, Amazon, Meta, and Microsoft. It appears that it will be difficult to formulate a tax that targets entities like these while exempting various other categories of taxpayers without tripping over the legal hurdles discussed above.
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1 Comcast v. Comptroller No. C-02-cv-02-10509 (Md. Cir. Ct.).
2 Koklanaris, Maria. “Md. Legislators Override Gov., Pass Nation’s 1st Digital Ad Tax.” Law360, https://www.law360.com/tax-authority/articles/1354931/md-legislators-override-gov-pass-nation-s-1st-digital-ad-tax.
3 Brown, Jason R. (2021) “The Maryland Digital Advertising Services Tax and the Expanding Map for Digital Taxes.” ABA Tax Times, vol. 40, no. 3, 2021.
4 Petition for Writ of Certiorari, Comcast v. Comptroller No. C-02-cv-02-10509 (Md. Cir. Ct.).
5 Chamber of Commerce of U.S. v. Franchot, Civil Action 21-cv-00410-LKG (D. Md. Mar. 30, 2022).
6 Md. Regs. Code 03.12.01.06
7 Md. Regs. Code 03.12.01.01(B)(3)(a)
8 id.
9 “Declaration of Estimated Digital Advertising Gross Revenues Tax.” Comptroller of Maryland, https://www.marylandtaxes.gov/forms/23_forms/600D.xlsx.
100 Md. Code, Tax-Gen. § 7.5-10(e)(2)
111 Md. Code, Tax-Gen. § 7.5-101(g)(1)
12 Md. Code, Tax-Gen. § 7.5-101(g)(2)
13 Md. Code, Tax-Gen. § 7.5-102(c)
14 La. H.B. 612
15 Mont. H.B. 363
16 N.Y. A. 734, S. 302, S. 1124
17 Tex. H.B. 4467, S.B. 1711
18 W. Va. S.B. 605
19 Mass. H. 732, H. 1683, H. 2894, H. 3081, S. 1439
20 Comcast v. Comptroller No. C-02-cv-02-10509 (Md. Cir. Ct.).
21 Fiscal and Policy Note, House Bill 732, at 10 (2020 Session)