Battle against Maryland digital advertising tax continues as first payments come due

Though Maryland is still fighting for the right to enforce its contentious tax on digital advertising gross revenues, the Maryland Comptroller is moving ahead with plans to collect the tax. The digital advertising gross revenues tax took effect January 1, 2022, and the first payments are due April 15, 2022.

The nation’s first tax on digital advertising gross revenues is facing legal challenges from numerous entities in two lawsuits (so far): one in federal court and one in state court. Plaintiffs in both cases allege the tax violates the Commerce Clause, the Due Process Clause, and the Internet Tax Freedom Act (ITFA). Additionally, the federal case alleges prohibiting businesses from passing on the cost of the tax violates the Commerce Clause and the First Amendment. The issues will be settled in federal court unless there is an appeal.

On March 4, 2022, the United States District Court for the District of Maryland decided the tax was a legitimate tax with an available and adequate state court remedy which preclude jurisdiction under the Federal Tax Injunction Act to hear a challenge to Maryland’s Digital Ad Tax Act (DATA, or DAT) but agreed to hear a challenge to an anti-pass-through provision. The case is Chamber of Commerce of the United States of America, et al., v. Peter Franchot, et al. (Civil Action No. 21-cv-00410-LKG).

In the state case, Judge Alison Asti of Anne Arundel County Circuit Court denied the state’s motion to dismiss on all counts except one during a hearing held March 14, 2022 (Comcast v. Comptroller). This allows the lawsuit to proceed. The case is Comcast of California Maryland Pennsylvania Virginia West Virginia LLC, et al. vs. Comptroller of the Treasury of Maryland (C-02-CV-21-000509).

The Digital Ad Tax Act taxes annual gross revenues derived from digital advertising services in Maryland by businesses with at least $100 million in global annual gross revenues. The tax rate ranges from 2.5% to 10% depending on the global annual gross revenues of the business.

Digital advertising services are defined as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”

However, advertising services on digital interfaces owned or operated by a broadcast entity or news media entity are not subject to the tax. Affected businesses cannot directly pass on the cost of the digital advertising tax to a purchaser of digital advertising services.

To date, Maryland is the only U.S. state with a tax on digital advertising. 

The District of Columbia jumped on the digital ad tax bandwagon in 2020 but jumped off after discovering a problem with its proposal. Connecticut, Indiana, Massachusetts, Montana, New York, Texas, Washington, and West Virginia all introduced digital advertising tax bills in 2021 but have yet to enact one. At this point, any state interested in taxing digital ads will likely wait to see what happens with Maryland’s tax before moving too far forward with a tax of their own.

Digital advertising taxes are common in other parts of the world: Roughly half of all European members of the Organization for Economic Co-operation and Development (OECD) either already have a digital services tax or have one in the hopper. Yet as in Maryland, these taxes are under fire.

Under the OECD’s new global minimum tax deal, the 136 participating countries must remove existing Digital Services Taxes “and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future.”

The OECD’s requirement that participating countries eliminate digital services taxes wouldn’t necessarily apply to state-administered digital advertising taxes. Vice President of Government Relations at Avalara Scott Peterson explains “The OECD plan is intended to restructure corporate income taxes in OECD countries to deal with how corporate income is earned by companies that do not have to be physically present. Think Wayfair for corporate income taxes.” Wayfair refers to South Dakota v. Wayfair, Inc., the 2018 U.S. Supreme Court decision that enabled states to tax remote sales. 

Peterson says there are two phases to the global minimum tax plan: “The first will switch the tax on corporate income from the home country to the country where a corporation's customers are located. The second will eliminate the incentive for a corporation to put income in a no- or low-tax country by imposing a minimum tax that would be imposed by other countries to make up for the low-rate country.”

In short, “the global minimum tax eliminates the need to tax digital companies because the charges would apply to all companies, including those with no physical presence in a country.”

Yet Maryland’s DATA faces other hurdles.

According to the Tax Foundation, Maryland’s digital ad tax is a mix of definitional ambiguity, suspect sourcing rules, and unworkable geolocation requirements.These are valid legal concerns. 

“The issues raised in the court cases challenge the state's right to impose the tax. It will be some time before some of the operational parts of the tax are fully understood,” says Peterson.

Nonetheless, as there’s no injunction preventing Maryland from enforcing its digital advertising gross revenues tax at this time, the Maryland Comptroller is moving forward with plans to collect the tax. You can find more information about the new tax requirements from the Comptroller and in Maryland Regs. 03.12.01.01 through 03.12.01.06, which took effect December 13, 2021.