Maryland hearing on Digital Advertising Tax highlights problems, hints at amendments  

Eversheds Sutherland (US) LLPOn February 28, 2020, Maryland’s proposed Digital Advertising Tax was the subject of a hearing by the Maryland House of Delegates’ Ways and Means Committee. House Bill 695 would impose a tax on Maryland gross revenues from digital advertising services at a rate of up to a 10%. An archived video of the hearing is available here.

After introductions by the bill’s sponsor – Delegate Washington – the Ways and Means Committee heard testimony from numerous witnesses, both supporting and opposing the bill. Delegate Washington noted that he had amendments to the bill that have not been introduced or described in any detail, although there was commentary that the amendments would address the bill’s sourcing provision and potential Internet Tax Freedom Act violations.

Summary of House Bill 695 

House Bill 695, along with its companion bill, Senate Bill 2, proposes a new Digital Advertising Tax, which would be imposed on the annual gross revenues derived from digital advertising services in Maryland. The definition of “digital advertising services” broadly includes “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” 

The tax rate varies from 2.5% to 10% of the annual gross revenues derived from digital advertising services in Maryland, depending on a taxpayer’s global annual gross revenues. To be required to pay the tax, a taxpayer must have at least $100,000,000 of global annual gross revenues and at least $1,000,000 of annual gross revenues derived from digital advertising services in Maryland.
The bill proposes to source (and tax) digital advertising services to Maryland-based on either: (1) a user’s IP address; or (2) the knowledge or reasonable suspicion that a user is using its device (which receives the advertising) in the state. 
House Ways and Means Committee Hearing 
Witnesses Opposed to House Bill 695: 
Witnesses from various industry and trade groups testified in opposition to the bill at the hearing, including the Internet Association, Association of National Advertisers, American Advertising Federation, and National Taxpayers Union. The witnesses echoed sentiments expressed in the prior Senate Budget and Taxation Committee hearing on Senate Bill 2. Several witnesses described the legal and constitutional problems with the bill, explaining that it may violate the Internet Tax Freedom Act, the Commerce and Equal Protection Clauses of the United States Constitution, and the First Amendment. 
The witnesses also raised the following additional issues with the bill: 
  • Because of legal and enforcement challenges, Maryland may never reach the revenue amount contained in the fiscal note;
  • Online companies that rely upon advertising revenue may have to adjust their business practices to account for the increased tax cost;
  • The overbroad definition of digital advertising services could inadvertently tax podcasts, coupons, sales calls over VoIP, etc.;
  • The tax would result in double tax on income already subject to Maryland’s corporate income tax; 
  • The tax would harm charities that rely on free grants of digital advertising to operate; and
  • The tax would exacerbate privacy concerns because companies would be required to track their interactions with those who view advertisements and retain this data for an extended period of time.
Witnesses in Support of House Bill 695:
Representatives of the Maryland State Education Association, Advocates for Children & Youth, and Maryland Center on Economic Policy, along with a Maryland resident, urged the Committee to pass the bill. The Maryland Fair Funding Coalition also filed written testimony in support of the bill.
Committee’s Response: 
Committee members indicated numerous concerns with the bill, including:
• Maryland would be the first state to impose a targeted tax on digital advertising;
• The cost of the tax would be borne by Maryland’s small businesses;
• The tax may not result in revenue for years, or possibly ever, because of legal challenges and enforcement difficulties; and
• The heavy fines and other penalties for compliance failure, even though it would be highly difficult for businesses to comply. 
One of Many 
Maryland is not alone in its effort to create a new tax targeted at electronic commerce. Several other states (Nebraska, New York, and West Virginia) have proposed legislation to expand their sales taxes to advertising services or proposed entirely new taxes on digital advertising services or data. While South Dakota proposed eliminating the sales tax exemption for advertising services, the House of Representatives’ Taxation Committee struck the provision from South Dakota House Bill 1284 on February 20, 2020, as Committee members noted that a tax on business inputs causes economic distortion, raises production costs, and places businesses at a competitive disadvantage to those businesses not subject to such taxes.
The Eversheds Sutherland SALT Team will continue to follow Maryland House Bill 695 and Senate Bill 2 during the legislative session, along with other advertising service and data tax bills. 

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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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