Digital advertising taxes in Maryland and New Mexico

You’ve got to admire Maryland’s tenacity. Although its controversial digital advertising tax was vetoed, challenged, and ultimately ruled unconstitutional, the state plans to keep fighting for the right to enforce it.

Meanwhile, New Mexico is updating regulations to clarify that digital advertising services, like other advertising services in the state, are subject to gross receipts tax.

Read on to learn about the events transpiring in Maryland and New Mexico, and how they’re different.

A brief history of the Maryland digital ad tax

Maryland lawmakers passed legislation establishing a tax on gross revenue from digital advertising sales back in March 2020. Calling the bill “misguided,” Governor Larry Hogan vetoed it a couple of months later, but the General Assembly overrode the veto in February 2021, and the tax took effect January 1, 2022. The first quarterly estimated tax payments for the digital advertising gross revenues tax were due April 15, 2022.

As Maryland prepared to administer the tax with one hand, it was fighting for the right to do so with the other. The tax was challenged in both federal court and state court on the grounds that it violates the Commerce Clause, the Due Process Clause, the Internet Tax Freedom Act (ITFA), and more. You can find additional details in this blog post.

The federal case over First Amendment and Commerce Clause challenges is still pending. According to the Maryland State Bar Association, oral arguments for Chamber of Commerce of the United States of America, et al., v. Peter Franchot, et al. (Civil Action No. 21-cv-00410-LKG) will be held November 29, 2022. Documents related to the case are available at the U.S. Chamber of Commerce Litigation Center.

The state case has already been decided. In October 2022, the Anne Arundel County Circuit Court declared the Maryland digital ad tax to be unconstitutional and in violation of the ITFA. The case is Comcast of California Maryland Pennsylvania Virginia West Virginia LLC, et al. v. Comptroller of the Treasury of Maryland (search for C-02-CV-21-000509).

So, what comes next?

Comptroller Franchot is ready to let the digital ad tax go

In a statement following the circuit court ruling, Maryland Comptroller Peter Franchot underscored his reservations about the tax. “As was the case when this legislation was being deliberated in the General Assembly,” he wrote, “I remain concerned about the constitutionality of this first-in-the-nation law to impose a tax on digital advertisement.”

Franchot doesn’t want to spend any more public resources defending a law he believes was “constitutionally questionable at the time of enactment.” He worries it will put a financial strain on small businesses. So rather than fighting on, he’d like to let Governor-elect Wes Moore and the incoming legislature revisit the law if they so choose.

Though Franchot is clear his preference is for the Anne Arundel County court ruling to stand, he won’t be in office much longer. Brooke Lierman will replace him in January 2023, and she reportedly “voiced support for the state’s embattled digital ad tax.”

Furthermore, others in the state are intent on carrying on the battle.

Attorney General Frosh intends to keep fighting

Maryland Attorney General Brian E. Frosh plans to continue to defend the Maryland digital ad tax. “This is a good law,” a spokeswoman for Frosh told Bloomberg by email. And indeed, Frosh filed a notice of appeal on November 21, 2022,

Bill Ferguson, president of the Maryland Senate and co-sponsor of the original digital ad tax bill, is in favor of appealing Judge Alison Asti’s ruling. “We are confident that the Attorney General will prevail in state courts on appeal,” he said in a statement reported by The Herald-Mail.

This isn’t the first time an attorney general has taken a different position than the state’s tax agency, notes Scott Peterson, VP of Government Relations at Avalara. He reminds that after the Supreme Court of the United States overturned the physical presence rule in South Dakota v. Wayfair, Inc., the Kansas Department of Revenue announced that all remote sellers were required to collect and remit tax on sales delivered into Kansas. The Kansas Attorney General disagreed with that position, finding it “inconsistent with Wayfair” and invalid because it failed to provide safe harbor for small businesses. You can read more about that situation here.

There was tension between the Kansas Department of Revenue and the Kansas Attorney General until the Legislature enacted an economic nexus law that established an exception for small sellers. How long the tension will last in Maryland remains to be seen.

Maryland’s digital ad tax is still in effect

The comptroller’s statement on the digital ad tax ruling doesn’t say Maryland is no longer enforcing the tax. And the comptroller’s digital advertising gross revenues tax webpage suggests the tax is still on.

If you’re unsure whether you’re liable for the tax, talk to a trusted tax advisor.

New Mexico already taxes all advertising services

New Mexico’s gross receipt tax is arguably the broadest sales tax in the country, so it’s no surprise that all forms of advertising services are already subject to New Mexico gross receipts tax. Yet while existing law calls out billboard, print, radio, and television advertising services, it doesn’t name digital advertising services because the statute predates their widespread use.

Thus, the New Mexico Taxation and Revenue Department has proposed updating the regulations “to reflect changes in technology and ensure that rules covering digital advertising are consistent with rules covering other forms of advertising.”

Under the proposed regulations, digital advertising services would generally be sourced to the location of the server from which the advertising is accessed. Following the publication of the proposed rules, a technology industry group asked the department to consider sourcing advertisements to the billing address instead.

The proposed regulations also specify that taxing gross receipts from digital advertising services does not impose “an unconstitutional burden on interstate commerce.” Thus, certain national or regional providers of digital advertising services would be eligible for a deduction.

In its comments to the department, the Council on State Taxation (COST) recognized the department is clarifying existing tax law but said “the proposed regulation highlights the complexities of the New Mexico Gross Receipts Tax regime and exacerbates the existing significant tax burden on businesses in the State.” The council is particularly concerned the digital advertising services tax could be applied retroactively. Yet as Scott Peterson notes, “It isn’t the department’s ruling that makes the tax retroactive, it’s that the law has always taxed digital advertising.”

On November 2, 2022, the Taxation and Revenue Department presented its plan to the New Mexico Revenue Stabilization and Tax Policy Committee. It explained that it’s difficult to determine the physical location of the viewer at the time an advertisement is seen, and that the Internet Tax Freedom Act “forbids discrimination of internet-based commerce with respect to taxation.”

The department is currently revising the proposed regulations, incorporating ideas from the comments received. It will publish the revised guidelines for further public review and comment in the near future.

Digital advertising tax proposals in other states

Lawmakers in a number of other states have considered taxing digital advertising or social media advertising revenue. In 2021, bills to that effect were introduced in Arkansas, Connecticut, Indiana, Massachusetts, Montana, New York, Texas, Washington, and West Virginia.

Exactly how the Maryland circuit court ruling or New Mexico’s tax on digital ad services will shape their plans remains to be seen.

Whatever happens, Avalara Tax Desk will report on these and new developments as they arise.


This post was updated November 29, 2022, after the Attorney General of Maryland filed a notice of appeal.

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