Business Groups Quickly Challenge Maryland’s New Digital Advertising Tax

Oops, Maryland did it again.

Last week, the state took a second crack at passing the country’s first digital advertising tax. This time it worked. 

After overriding Gov. Larry Hogan’s veto of their 2020 DST bill, the Maryland General Assembly on Feb. 12 adopted a digital tax that is scheduled to take effect quickly: by March 14. Whether or not, and how, the new law’s implementation moves forward remains to been seen given that an impressive collection of business and industry groups acted swiftly to challenge its legality.  

The lawsuit against Maryland’s Digital Advertising Gross Revenues Tax (HB 732) was jointly filed by the U.S. Chamber of Commerce, the Internet Association, the Computer & Communications Industry association and NetChoice. Other industry groups and companies are expected to join the lawsuit.  

“It’s unfortunate that the Maryland General Assembly has decided to penalize a handful of out-of-state companies with this discriminatory law,” Internet Association Senior Vice President and General Counsel Jon Berroya said in a statement. “This is a case of legislative overreach, punishing an industry that supports over one hundred thousand jobs in Maryland and contributes tens of billions of dollars to its economy each year. Internet services and companies are proud to play a role in creating opportunities for Maryland’s small businesses and citizens. We look forward to defending our industry in court.”

The passage of a new digital advertising tax by a U.S. state was not unexpected, as I explained last year; Maryland, New York, Nebraska and Kansas all proposed some form of digital taxes in 2020. This year, Connecticut, Indiana, Oregon and Washington already have unveiled similar proposals, some of which target revenue from social media advertising. And New York State lawmakers are considering several different proposed bills calling for new taxes on digital advertising services or on companies that derive revenue from personal data.  However, adding to the complexity and controversy of this particular digital tax is the fact that in a concurrent Bill, the Maryland Senate has also proposed to “prohibit a person from directly passing on the cost of the digital advertising gross revenues tax to a customer through a separate fee, surcharge, or line-item.” Yet, the Bill does not prevent companies from raising prices.

Without a doubt, many states are watching the Maryland “fiscal canary.” Ideally, any consideration and drafting of a new digital tax law should be conducted in a careful and thorough manner to avoid succumbing to legal challenges. Of course, the Covid recession has left many state budgets in far less than ideal condition. By rushing to draft new digital tax laws, states could enact rules that discriminate against digital media (vs. print or other types of media advertising), run afoul of the Permanent Internet Tax Freedom Act and pose other constitutional problems. In addition, such laws decelerate recovery in some sectors and can create negative externalities and other market inefficiencies. It would be best to avoid those types of fiscal train wrecks.