Maryland becomes first state to adopt a digital advertising tax

Update March 9, 2021: Maryland is fast-tracking a measure that would push the start of the digital advertising tax to January 1, 2022, prohibit taxpayers from directly passing on the cost of the tax to certain customers, and exempt ads on digital interfaces owned or operated on behalf of a broadcast or news media entity. See SB 787 for more details.

The Maryland Legislature has adopted the first digital advertising tax in the nation. It’s expected to generate $250 million in its first year.

Lawmakers approved House Bill 732 in March 2020, but Governor Larry Hogan vetoed it. He said at the time that it would be “unconscionable to raise taxes and fees” during a global pandemic and state economic crash. On February 11 and 12, 2021, the Maryland House and Senate easily overrode the veto.

New tax on gross revenue from digital advertising services

HB 732 taxes annual gross revenues derived from specified digital advertising services, including banner advertising, interstitial advertising, search engine advertising, and other comparable advertising services.

Tax rates are based on a person’s global annual gross revenues. The greater the revenue, the higher the tax rate:

  • 2.5% of the assessable base for a person with global annual gross revenues of $100 million through $1 billion
  • 5% of the assessable base for a person with global annual gross revenues of $1,000,000,001 through $5 billion
  • 7.5% of the assessable base for a person with global annual gross revenues of $5,000,000,001 through $15 billion
  • 10% of the assessable base for a person with global annual gross revenues exceeding $15 billion

Only businesses with at least $1 million in annual gross revenue from digital advertising services in Maryland are required to file the new digital advertising tax return. Nonetheless, critics of the tax worry it will force many smaller businesses to reduce their digital advertising spend, and thus limit their advertising reach. It’s widely assumed larger businesses will pass the cost of the tax on to advertisers.

Although Maryland is the first state in the country to adopt a digital advertising tax, it isn’t exactly blazing a trail. France and India are among the countries already taxing some digital services. Many other countries have digital services taxes (DST) in the making; more details can be found at Avalara’s digital services tax DST global tracker.

And here in the U.S., several states are working to adopt similar taxes. The District of Columbia got close to imposing a 3% sales tax on personal information and advertising services in 2020, when Nebraska also explored extending retail sales tax to digital advertisements. A bill seeking to create a digital advertising services tax failed to gain traction in New York in 2020, but lawmakers are trying again this year.

Indeed, similar legislation has been introduced in several states, including:

  • Connecticut: House Bill 6187 would impose a 10% tax on annual gross revenues derived from digital advertising in the state (businesses must have annual global gross revenues exceeding $10 billion)
  • Indiana: House Bill 1312 would impose a surcharge tax on social media providers
  • Montana: LC 3237 would impose a 10% tax on annual gross revenues derived from digital advertising services in Montana by persons with worldwide annual gross revenue from digital advertising services of $25 million or more
  • New York: Several bills would tax digital advertising services
  • Washington: House Bill 1303 would impose a gross income tax on persons making sales of personal data or exchanging personal data for consideration (an entirely different kind of digital tax)

Nonetheless, Maryland’s digital advertising tax will likely be challenged.

The Tax Foundation calls it “a vague concept in search of definitions.” It suggests the tax runs afoul of the Permanent Internet Tax Freedom Act because it taxes online advertising but not more traditional forms of advertising. Furthermore, “it may fail a Dormant Commerce Clause analysis under the U.S. Constitution” because the tax rates are based on worldwide gross revenues, not Maryland revenue. The Tax Foundation also notes the tax “would fall substantially on Maryland companies advertising to Maryland residents.”

Yet barring an injunction, Maryland’s digital advertising tax is scheduled to take effect 30 days after the override vote, or March 14, 2021. If it does, affected taxpayers have little time to determine which services are subject to the tax, and at what rate.

For up-to-date information about digital advertising taxes in Maryland or other states, read the Avalara blog.

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