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Maryland Becomes First State to Adopt Digital Ad Tax

Posted on Feb. 16, 2021

Maryland has become the first state to adopt a tax on digital advertising, with both chambers of the Democrat-controlled General Assembly voting to override the governor’s veto of the tax.

The Senate voted February 12 to override Republican Gov. Larry Hogan’s veto of H.B. 732; the House voted to do so the day before.

The override was successful despite pushback from a coalition of more than 200 businesses and Republican legislators who sought to sustain the veto.

Opponents of the bill argued that the tax would not hurt the large tech companies it is meant to target but instead will be passed on to small businesses that are already struggling to stay afloat during the COVID-19 pandemic.

Under H.B. 732, digital advertising services will be taxed using an apportionment fraction based on global annual gross revenue. The tax will be imposed at the following rates:

  • 2.5 percent of assessable base for companies with revenue of $100 million through $1 billion;

  • 5 percent for revenue between $1 billion and $5 billion;

  • 7.5 percent for revenue between $5 billion and $15 billion; and

  • 10 percent for revenue over $15 billion.

The tax takes effect 30 days after the override, according to Jake Weissmann, spokesman for Senate President Bill Ferguson (D).

The bill, part of a revenue package meant to support education reforms in the state, also increases excise taxes on tobacco and imposes a wholesale tax on vapor products. The digital ad tax is expected to generate up to $250 million in the first full year of implementation.

The tax is based on a proposal by economist and Nobel Prize laureate Paul Romer, who pitched the idea in in a 2019 op-ed in The New York Times as a way to fix the tech industry, which he said has "created a haven for dangerous misinformation and hate speech that has undermined trust in democratic institutions."

Legal experts have said Maryland's digital ad tax would likely violate the federal Internet Tax Freedom Act and run afoul of the First Amendment.

Stephen P. Kranz, partner at McDermott Will & Emery, told Tax Notes February 12 that “it will not be long before they’re in court being challenged. The tax is so blatantly illegal it’s surprising that legislators were willing to adopt it, but politics are what they are and the courts will have to do their job.”

Kranz also said, “Companies should discuss with their tax adviser or tax department how to make sure they are able to get a refund of any monies paid illegally.”

Doug Mayer, a lobbyist for Marylanders for Tax Fairness and a former aide to the governor, said in a statement that the coalition “will continue fighting this regressive tax wherever possible, including in a court of law.”

The coalition’s members include the Council On State Taxation, the American Advertising Federation, the Maryland Chamber of Commerce, the MDDC Press Association, and the Association of Magazine Media.

During a floor debate before the Senate vote, Sen. Jim Rosapepe (D), vice chair of the Senate Budget and Taxation Committee, argued that the bill will ensure that companies like Facebook and Google that have profited during the pandemic pay their fair share.

Rosapepe encouraged legislators to support a separate bill (S.B. 787/H.B. 1200) introduced by Ferguson that is designed to prevent the digital ad tax from being passed on to small businesses.

Senate Finance Committee member Justin Ready (R) disagreed, saying, “Facebook will be fine; the small businesses will be hurt.”

In a statement, Robert Callahan, senior vice president of state government affairs for the Internet Association, said, “It is a shame that the Maryland General Assembly chose political theater over sound public policy with today’s veto override vote of H.B. 732.

"Maryland now has the dubious honor of being the only state in the country to have ever passed such a flawed tax, and the added distinction of doing so in the middle of a pandemic and economic crisis. At least Maryland businesses and consumers can rest easier knowing that the courts will have the last say on this matter, and that the law, not politics, will decide the outcome," Callahan said.

The association counts Google, Facebook, and Amazon among its members.

Digital advertising tax proposals were considered in the District of Columbia, Nebraska, and New York last year. A proposal based on the Maryland bill is being considered this year in Connecticut.

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