4 Facts about Maryland’s New Digital Advertising Tax

As I reported last month, Maryland adopted a digital advertising tax that is designed to be implemented quickly – and has sparked a swift legal challenge.

While all arguments remain valid, the Maryland Senate Budget and Taxation Committee continues to consider ways to shape the compliance rules the new law calls for. This is one of several key points that tax leaders within companies affected by Maryland’s new digital advertising tax – as well as those in companies that would need to respond if similar bills in other state legislatures become law – should keep in mind:

1. Maryland’s new tax is a law, and it will be implemented: Maryland’s Digital Advertising Gross Revenues Tax (HB 732) was voted into law by the state’s General Assembly on Feb. 12. It is scheduled to take effect by March 14, and that seems unlikely to change as of today. There are, however, uncertainties concerning the law’s viability and its effective date from a compliance perspective.
2. Compliance may be delayed: Late last month, the Maryland state senate’s budget and tax committee proposed delaying the effective date for compliance with its new tax requirements from this year to Jan. 1, 2022. Given that the proposed delay was sponsored via an amendment by the bill’s top advocate in the state senate, the change seems likely to materialize.
3. The legal challenge against Maryland’s new digital advertising tax is strong but still judicially vulnerable: A lawsuit challenging the new law was filed less than a week after the bill’s passage. The civil case was brought by the U.S. Chamber of Commerce, the Internet Association, the Computer & Communications Industry association and NetChoice. Those plaintiffs are represented by the law firm McDermott, Will & Emery. (One of the McDermott lawyers on the case, Stephen P. Kranz, writes regularly on digital taxation, and the summary of Maryland law he co-authored here is a good primer.) The legal challenge maintains that the new law violates the Internet Tax Freedom Act and the Commerce and Due Process Clauses of the U.S. Constitution. However, given the post-Covid era fiscal necessities combined with concerning issues related to fairly taxing the digital economy, will the court(s) consider shifting policy toward balancing e-commerce with more contemporary methods of taxation? This is similar, to some extent, to the Supreme Court’s core rationale in South Dakota v. Wayfair, which the president of the Maryland Senate admittedly has modelled.
4. The legal challenge sends a message: Connecticut, Indiana, New York, Oregon and Washington have proposed bills that are similar, to varying degrees, to Maryland’s new law. Lawmakers in these and other states will be watching closely – and probably adjusting in response – as the legal challenge to Maryland’s digital advertising tax plays out. Although we are mainly watching the legal consequences, the economic implications of both sides will be far greater.

An Interesting note: On Feb. 12, 2020, while overriding Gov. Hogan’s veto, the Maryland Senate also passed House Bill 932, or the 21st–Century Economy Fairness Act, extending the sales tax base to include “the sales of digital products, codes, and services” (2020 H.B. 932). The bill imposes the state sales and use tax on specified digital products and codes and requires all sales and use tax revenue received from the sale of digital products and codes to be distributed to the Blueprint for Maryland’s Future Fund (BMFF). Call it a hedge or a safety measure, this fiscal assurance move closes the circle on the state’s indirect digital taxation.

Developments in this legal battle are going to continue to unfold, and as always, we’ll update you when they do.