Special Tax Alert
In an effort to raise revenue, Maryland recently passed the nation’s first tax on digital advertising services (House Bill 732), which was subsequently vetoed by Governor Larry Hogan. On February 12, the Maryland legislature overrode the Governor’s veto. As a result, the law takes effect 30 days from the date of the override and will apply retroactively to tax years beginning after December 31, 2020.
The “Digital Advertising Gross Revenue Tax” will tax gross revenue derived from digital advertising services in Maryland. The bill defines “digital advertising services” as “advertisement services on a digital interface, including advertisements in the form of banner advertisements, search engine advertising, interstitial advertising, and other comparable advertising services.” Gross revenue from digital advertising in Maryland will be taxed at tiered rates based on taxpayers’ global annual gross revenue:
Big-tech companies, expected to be most heavily impacted by the new tax, have reacted swiftly to the controversial new law. On February 18, only days after the law was finalized, the U.S. Chamber of Commerce along with several large trade organizations filed a lawsuit against the Comptroller of Maryland in the U.S. District Court for the District of Maryland.
The lawsuit seeks to invalidate the digital advertising services tax and enjoin its enforcement. The plaintiffs contend that the tax is an unlawful violation of the Internet Tax Freedom Act, which prohibits states from discriminatorily taxing e-commerce and internet access, as well as the U.S. Constitution’s Commerce Clause and Due Process Clause “by burdening and penalizing purely out-of-state conduct and interfering with foreign affairs.”
Before arguing the merits of the case, however, the plaintiffs face a procedural hurdle—the federal Tax Injunction Act (TIA), which limits the district court’s authority to enjoin, suspend or restrain the assessment, levy or collection of any tax under state law. The complaint, which refers to the law as “a punitive assault on digital, but not print, advertising,” asserts that the TIA does not deprive the district court of jurisdiction because the law is not a tax, but rather a “punitive fee.”
Although Maryland is the first state to enact a tax on digital advertising services, other states are exploring ways to target digital advertising as a potential revenue stream. Connecticut, Montana, and New York are already considering similar legislation. This is especially notable as states struggle to recover from decreased collections due to the pandemic and with increased social payments. Although Maryland is the first state to enact this legislation, it almost certainly won’t be the last. The outcome of the Maryland lawsuit will likely influence other state legislatures and play a significant role in shaping the way states attempt to tax digital advertising.
The Alvarez & Marsal Taxand State and Local Tax (SALT) team is monitoring these developments. If you are interested in discussing how these new taxes may impact your business, please do not hesitate to reach out to one of our team members.