Lawsuit Warned as Maryland Digital Tax Bill Nears Passage

Advertisers raised the specter of litigation Tuesday as a Maryland digital tax bill neared final passage. Maryland state senators amended a smoking tax bill (HB-732) Monday to include the text of SB-2 that would impose taxes on annual gross revenue from digital ad services, ranging from 2.5% to 10%, for companies exceeding $100 million annual revenue. A New York state senator proposed a similar bill there on Friday.

HB-732 came up for final reading Tuesday afternoon, but the bill was laid over so senators didn't vote. That didn’t preclude a vote later Tuesday or Wednesday before session ends. The House previously passed the bill but would have to concur with the Senate’s amendment. Maryland’s legislature is adjourning three weeks earlier than originally scheduled due to COVID-19, said the National Conference of State Legislatures. Majority Democrats supported and minority Republicans opposed the measure at a January hearing (see 2001290054).

Maryland Gov. Larry Hogan (R) hasn't "taken a position on this bill," but "the governor has expressed his opposition to raising taxes," a spokesperson emailed us.

Hogan should veto the measure if it passes the legislature, and should expect a lawsuit if it's enacted, said Association of National Advertisers (ANA) Group Executive Vice President-Government Relations Dan Jaffe in an interview. ANA would have to discuss with members if the association should sue, he said. Lawmakers see the tax as one way to pay for a state education bill, but they should realize it’s not worth the likely lawsuit, Jaffe said. Democratic SB-2 sponsor Sens. Mike Miller and Bill Ferguson didn’t comment Tuesday.

Taxing digital advertising is prohibited by a federal law, the Internet Tax Freedom Act (ITFA), Jaffe wrote in a Monday letter to Maryland legislators. The bill inappropriately taxes based on gross revenue throughout the U.S. and establishes tax rate thresholds based on global revenue, when both should be calculated based on Maryland alone, he said. “These provisions implicate activities over which the State does not possess jurisdiction, in violation of the Commerce Clause of the U.S. Constitution. By segregating digital advertising from other kinds of speech, the bill raises concerns about protection of speech under the First Amendment and inequitable treatment of one sector of the economy.”

The bill has several problems, said Eversheds Sutherland tax lawyer Samantha Trencs. “The bill legislatively punts responsibility to the Maryland Comptroller ... to determine when digital advertising revenue is in Maryland,” she emailed. “Taxpayers would have no idea how to comply and calculate the tax owed until regulations are issued. This fundamental omission creates an unconstitutionally ambiguous tax regime.” The bill “proposes to tax digital advertising but not traditional advertising like billboards or classified ads, which discriminates against electronic commerce in violation of ITFA," she said.

“With all the economic uncertainty occurring due to COVID-19, now is certainly not the time for the Maryland Legislature to enact new taxes,” Trencs said. Jaffe agreed: “This is the worst possible time to be putting a tax on [advertisers’] effort to sell when the economy for the whole of the United States ... is being rocked by all the problems caused by the coronavirus.”

“The purpose ... is to tax large digital advertising companies, but the true burden will ultimately fall on small businesses and consumers in Maryland,” the National Taxpayers Union wrote legislators Tuesday. The Maryland, Delaware, District of Columbia Press Association thinks the bill “will be devastating for our industry and all businesses in Maryland,” it said in a Monday newsletter. It would take effect July 1, “a time when Marylanders will still be reeling from the effects of the COVID-19 epidemic,” the group said.

ANA worries other states will try similarly, said Jaffe, citing the proposal in New York state. A federal court decision saying one enacted state law is unlawful would stop others from trying to tax digital, he said.

New York Deputy Majority Leader Michael Gianaris (D) proposed a digital tax Friday in SB-8056. “New York’s proposed digital advertising tax is very similar to the tax proposed in Maryland,” Eversheds Sutherland lawyers blogged Sunday. “The major difference is that while the Maryland tax would apply to all digital advertisement services, the New York tax would be limited to targeted advertisements, i.e., those ‘that use personal information about the people the ads are being served to,’” they said. ANA is opposed, Jaffe said. Gianaris didn’t comment.