Just when you thought you were out: The Maryland Comptroller drops proposed sourcing reg for the digital ad tax 

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLPOn August 31, 2021, the Maryland Comptroller filed proposed regulations on the controversial digital advertising gross revenues tax (the DAT) with the Joint Committee on Administrative, Executive, and Legislative Review.1 Of primary interest to potential DAT taxpayers, and described in this Legal Alert, the regulations adopt a device-based apportionment fraction. The comment period for the proposed regulations runs through November 8, 2021; a public hearing will be scheduled at a later date.

Background and statutory regulations

As discussed in our prior Legal Alerts, Maryland was the first state in the US to adopt a targeted tax on digital advertising service revenues. The statutory provisions that determine the tax base – “annual gross revenues derived from digital advertising services in the State” – are sparse. Moreover, the General Assembly delegated the sourcing regime to the Comptroller through administrative regulations.  

Eversheds Sutherland Observation: Because the proposed regulations are legislative – not interpretive – regulations, the Comptroller may be provided with more deference when challenged on facial or as-applied bases. Therefore, it is imperative that potential DAT taxpayers submit comments to the Comptroller by the November 8th due date.

The Comptroller’s proposed regulations

The Device-Based Sourcing Rule. The Comptroller proposes to calculate the numerator of the apportionment fraction (i.e., gross revenues from digital advertising in Maryland) by looking to whether the device showing the advertising is in Maryland. Proposed COMAR (Aug. 31, 2021).

Eversheds Sutherland Observation: When applying the device-based apportionment fraction, the Comptroller’s proposed sourcing regulation adopts a worldwide approach. The statutory tax rates are also based on worldwide annual gross revenue from all sources - not just advertising. 

The proposed sourcing regulation next describes the “development” of the statutory apportionment fraction in Md. Code Ann. Tax-Gen §7.5-102(b)(1) in a four-step computation:

  • First, “[a]n apportionment factor shall be developed as a fraction, where the numerator is the number of devices that have accessed the digital advertising services from a location in the State, and the denominator is the number of devices that have accessed the digital advertising services from any location.” Proposed COMAR (Aug. 31, 2021).
  • Second, that factor would next be applied to “the digital advertising gross revenue received by the taxpayer to compute the digital advertising gross revenue attributable to the State.” Proposed COMAR (Aug. 31, 2021).
  • Third, the Comptroller adopts a throwout rule for devices that have an “indeterminate” location.  A DAT taxpayer will be required to exclude from the numerator and the denominator (described above) those devices that a taxpayer cannot identify – on a worldwide basis – “the actual, physical location of a digital interface when a digital advertising service is accessed by a user.” Proposed COMAR (Aug. 31, 2021).
  • Finally, the factor is “applied to the digital advertising gross revenue pursuant to [the second step, above, in COMAR], without any adjustment to the amount of revenue to be apportioned.” COMAR

The Comptroller prepared two examples to describe how the four-part factor computation should be applied:

Example 1: Company A receives $100 in gross revenue attributable to digital advertising services. These services are accessed by 1000 devices worldwide, all of which have an identifiable location. Of these devices, 500 are located outside the United States and 500 are within the United States, 10 of which are in the State. Company A would have $1 (10/1000 x $100) of digital advertising gross revenues derived from the State.

Example 2: Company B receives $100 in gross revenue attributable to digital advertising services. These services are accessed by 1000 devices worldwide, 500 of which have an identifiable location. Of those, 400 are located outside the United States and 100 are within the United States, 10 of which are in the State. Company B would have $2 (10/500 x $100) of digital advertising gross revenues derived from the State.

Proposed COMAR (Aug. 31, 2021).

Eversheds Sutherland Observation: The computation is complex, and requires some assumptions, as shown through the below progression:

The Comptroller provides non-exclusive methods by which a taxpayer must “use the information within their possession or control which most reliably identifies a device’s location” for computing the apportionment fraction:

(a) Internet protocol;

(b) Geolocation data;

(c) Device registration;

(d) Cookies; or

(e) Any other comparable information.

Proposed COMAR, -(2) (Aug. 31, 2021).

In another implicit acknowledgment of the complexities with determining device location, the Comptroller provides that device location will be determined by “a totality of the facts and circumstances” as to whether the device is within Maryland, within or without the United States, or “indeterminate.”

Eversheds Sutherland Observation: The proposed regulation is among the first examples of state tax guidance that adopts sourcing rules based on IP-address, geolocation data, device registration, and cookies. These data-sets may produce inaccurate location data, such as when a device user accesses a website via a virtual private network.

A similar analysis applies when determining if a device location is in the United States or internationally, as to the analysis for determining a Maryland device location. Proposed COMAR (Aug. 31, 2021).

Declaration of Estimated Tax – Due April 15, 2022.  Finally, the proposed regulation also includes provisions related to DAT returns and declarations.  Proposed COMAR, .06 (Aug. 31, 2021). Taxpayers who “reasonably expect” to owe DAT in excess of $1 million for a calendar year must file a declaration of estimated tax with the Comptroller of estimated DAT, on forms issued by the Comptroller. The declaration form is expected to be issued before its due date of April 15, 2022. See Md. Code Ann. Tax-Gen. §7.5-201(b). 


1 These proposed regulations were filed with the “AELR” on August 30th, with the intent that they will be published in the Maryland Register on October 8th.  The AELR is composed of 10 senators appointed by the President of the Senate and 10 delegates appointed by the Speaker of the House.  Proposed regulations are submitted to the AELR for review at least 15 days before they are submitted to the Maryland Register for publication.  The AELR reviews any proposed regulations to determine whether the regulations conform to the agency’s statutory authority and the statute’s legislative intent.  The AELR may suggest changes to the regulation or formally vote to oppose the regulation’s adoption.  If the committee opposes the regulation’s adoption, the regulation cannot be adopted unless approved by the Governor.  See https://mgaleg.maryland.gov/pubs-current/aelr/AELR-Regulation-Review-Process.pdf

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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