On a recent podcast, our State and Local Tax team discussed the Maryland digital advertising tax, which proposes a first of its kind state tax on digital advertising imposed on gross revenues of up to 10%. The bill awaits Governor Larry Hogan’s signature – and he is expected to veto it.
Here are ten things that you need to know about the recently passed Maryland Digital Advertising Tax:
- First in the nation
Maryland’s digital advertising tax is the first in the nation to target digital advertising and is unlike anything we have seen in the United States before.
- What’s next?
The Maryland digital advertising tax passed with three-fifths support in both the House and the Senate. Governor Larry Hogan is expected to veto the bill, as he has been very vocal about his disapproval of any tax increases. The legislature can override his veto by a three-fifths vote in both chambers. Three senators or 10 delegates would need to change their minds in order to sustain the Governor’s veto. The Maryland legislature is planning to convene for a special session at the end of May.
- Effective date
The tax will applies to all taxable years beginning after December 31, 2020.
- Unclear language
The bill does a bad job of explaining what a digital advertising service is, or who actually does it. The bill defines digital advertising service as including advertisement services on a digital interface. It is not clear what is considered a digital interface because it is vaguely defined.
- What ads are taxable?
Taxable ads include banner, search engine ads and very broadly, “other comparable” ads. There is no explanation of what makes an ad “comparable.” It does not apply to traditional print advertisements, like classified ads, circulars and newspaper ads.
- Ambiguous tax base
There is very little description as to how to determine digital advertising taxable by Maryland. Instead of creating clear rules for how much and what revenue can be taxed, the Maryland legislature punted responsibility to the Comptroller to issue guidance. The Comptroller will need to issue regulations (or some other type of guidance) before taxpayers can actually determine how to calculate their tax liability. This legislative “lateral” to the Comptroller is an abandonment of the legislature’s responsibility to actually draft tax legislation.
- Who will be taxed?
The tax will apply to any company that meet two thresholds – $1,000,000 of gross revenues in Maryland derived from digital advertising services and $100,000,000 of global annual gross revenues.
- Varying tax rates
The tax rate varies from 2.5% to 10% depending on a company’s global annual gross revenues. The tax rate is not determined with respect to Maryland digital advertising. Rather, it focuses on global revenues from any source and any activity.
- Legal challenges
The Maryland digital advertising tax – if enacted – will face a number of legal challenges, including a violation of the Internet Tax Freedom Act, which prohibits states from imposing discriminatory taxes against electronic commerce. The tax also likely violates the Commerce Clause of the United States Constitution. The tax’s high thresholds, especially for the elevated tax rates, are targeted at out-of-state companies. Plus, there is a mismatch between the elevated tax rates and advertising activity in the state. The high tax rates apply to large companies, but not necessarily ones that engage in Maryland digital advertising.
- What you can do!
There is still time to stop the digital advertising tax from being enacted. A veto override requires three-fifths support in each chamber. Taxpayers can still lobby the legislature’s members to oppose the tax.