Beware the Banner Ad – The New Maryland Tax on Digital Advertising
by Jamie Rubin & Joseph E. Bender
We are thrilled to welcome our former partner and great tax attorney, Joseph E. Bender, as a guest co-author on the InfoLawGroup blog. Thank you, Joe!
Will Rogers observed that the difference between death and taxes is that death doesn't get worse every time Congress meets. In this case, it wasn’t Congress but the Maryland State Legislature. On February 12, 2021, the Maryland Senate joined that state’s House of Delegates and voted to overrule Governor Hogan’s veto of the Digital Advertising Gross Revenue Tax, thereby making Maryland the first state in the U.S. to tax digital advertising. The Digital Advertising Tax is now law and applies to all tax years beginning after December 31, 2020.
What is it?
The tax, which applies at graduated rates, applies to the gross revenue that a company or other entity or person earns from digital ads that are displayed in the state of Maryland. Thus, unlike an income tax, this tax is basically a sales tax or an excise tax in that it is imposed on the gross (not net) value of the advertising revenue. Another difference is that this tax is imposed on the company selling the advertising — that is contrasted with the traditional sales (consumption) tax, where the tax is imposed on the buyer for using the acquired property in the state.
The tax looks to be targeted at the big internet-based ad sellers, since it starts at worldwide income above $100 million (imposed at a rate of 2.5%), and then jumps to 10% on worldwide income over $15 billion:
| Rate | Global Annual Gross Revenues |
|---|---|
| 2.5% | $100 million to $1.0 billion |
| 5.0% | 1.0 billion to $5.0 billion |
| 7.5% | $5.0 billion to $15.0 billion |
| 10.0% | Over $15.0 billion |
To put this in perspective, Google earned almost $147 billion in FY 2020, according to Investopedia (citing Google’s SEC 10-K form).
Who is subject to the Tax, and who pays the Tax?
While only large internet enterprises will be subject to the tax (i.e., gross worldwide advertising revenue in excess of $100 million), “news” organizations will not be subject to this new tax even if a news organization sells ad space. Maryland will exempt advertising on digital interfaces (i.e., website and apps) owned or operated by or on behalf of either a broadcast entity or a news media entity. A “broadcast entity” is a company that is primarily engaged in operating a broadcast television or radio station, and a news media entity is any entity that is primarily engaged in the business of newsgathering, reporting, or publishing articles or commentary about news, current events, culture, or other matters of public interest. In order to avoid what could be considered an easy loophole, however, a company that is simply an aggregator or a republisher of third-party content will not qualify as an exempt news organization.
The Maryland law has an express provision that prevents a company subject to the tax from passing the tax on to a user by way of a separate line item charge (much like sales tax is specifically identified on a receipt). However, there is no rule that prevents a company from simply increasing its overall charge to a user to compensate for the new tax.
Wait – the Internet is global and not local. How is an Advertiser supposed to figure out how much revenue it is earning from ads “seen” in Maryland?
Good point. The state basically punted on this issue and the legislators directed the Maryland Comptroller to adopt regulations on how this will be determined. As of the date of this article, the Maryland Comptroller has not given any timeline to issue that guidance.
Hey, didn’t they try this in Europe?
Yes indeed. About half of the European countries in the Organisation for Economic Co-operation and Development, or OECD, have either passed or proposed a “Digital Services Tax” or DST. While each country differs slightly, France’s DST tax is the most robust, imposing a 3% tax on revenues from the provision of a digital interface and targeted advertising, as well as revenue from the transmission of data collected about users for advertising purposes. While there is a patchwork of different laws across the OECD countries passing such a DST, it would be reasonable to assume that the OECD countries may attempt to adopt a uniform standard about the scope and application of a Europe-wide DST.
Ok, I get it. Are these digital taxes the wave of the future in the States?
Needless to say, there are a lot of legal challenges to Maryland’s tax. Indeed, the Association of National Advertiser’s is expecting successful challenges to the law.
First of all, there is the Permanent Internet Tax Freedom Act, which grew out of the Internet Tax Freedom Act that was passed in 1998 in the early(ish) days of e-commerce on the Internet. The first Internet Tax Freedom Act prohibited state and local governments from taxing internet access, as well as prohibiting certain other discriminatory taxes on e-commerce. Under the Permanent Internet Tax Freedom Act, a state is prohibited from imposing discriminatory taxes on electronic commerce. Since Maryland does not impose a tax on “traditional” advertising services, there is an argument that taxing online ads is discriminatory.
Second, before a state can impose a tax on a company, the company has to have some “nexus” with the state, which is some connection between the company and the state that will allow the state to impose its taxing jurisdiction over the company. In the old days, the Supreme Court had a bright line rule that required a company to have some physical connection with the state before the state could tax the company, such as an office, warehouse, employees, etc. in the state. Since 2018, the U.S. Supreme Court, in its Wayfair decision, concluded that physical presence was not necessary, and that a state could impose tax on a company if it had an “economic nexus” with the state. Per the Wayfair decision, economic nexus could include targeted and repeated sales by a remote seller into a state. However, it will remain to be seen if simply hosting a potentially nationwide ad campaign that does not target any state particularly can be considered to meet the economic nexus threshold.
A third and related issue is that, in order to be subject to the Maryland tax, a company has to have at least $100 million in advertising sales, but that is measured on a worldwide basis, without any regard to Maryland-specific revenue. Thus, Maryland is seeking to use revenue outside of the state as the trigger to impose tax liability. That is a stretch.
To that end, on February 18, 2021, a group of plaintiffs including the U.S. Chamber of Commerce, the Internet Association, Netchoice and the Computer & Communications Industry Association filed a lawsuit against Maryland seeking an injunction against enforcement of the digital advertising tax. Keep looking to this site and we will have an analysis of that suit.
So, what’s the takeaway?
We are at the tip of the iceberg. Right now, there are a number of challenges to the Maryland tax that have a good chance of succeeding. However, we don’t think Maryland will simply abandon its proposal; it will likely have to go back to the drawing board. Moreover, a number of other states (including D.C., Nebraska, New York and South Dakota) have proposed or are considering similar taxes. It is important to keep track of this issue if history of the so-called “Amazon Tax” is an indicator of where this is going. States attempted regulation, challenges ensued, and the U.S. Supreme Court ultimately weighed in.
Originally published by InfoLawGroup LLP. If you would like to receive regular emails from us, in which we share updates and our take on current legal news, please subscribe to InfoLawGroup’s Insights HERE.