Maryland Passes Digital Advertising Tax, Now Being Challenged in Court

Morgan Lewis

Morgan Lewis

The Maryland state legislature voted on February 12 to override Governor Larry Hogan’s veto and thus enacted the Digital Advertising Act, the first tax of its kind in the United States. Other states such as Indiana, New York, and West Virginia have made similar proposals. However, the success of Maryland’s digital advertising tax is in question as a challenge was brought within one week of its passing in the US District Court of Maryland.


The digital advertising gross revenue tax is imposed on the annual gross revenues of a person derived from digital advertising services in the State of Maryland. “Annual gross revenues” means income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. Annual gross revenue in the state is determined using an apportionment formula, the numerator of which is annual gross revenue from digital advertising services in the state and the denominator of which is annual gross revenue of a person derived from digital advertising services in the United States. “Digital advertising services” include 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 newly enacted language does not define the phrase “derived from digital advertising services in the state.” The tax rate imposed is based on a schedule of annual gross revenues with the highest rate at 10%.

The tax is set to take effect 30 days after its passage (March 14), and is effective for taxable years beginning after December 31, 2020. The first quarterly payment would be due April 15. Quarterly estimated payments are required for persons with estimated annual gross revenues in the State of Maryland that exceed $1 million. Each person with annual gross revenues of at least $1 million in the state is required to file an annual return in the next year. However, whether the tax will remain in place is in question, as several trade groups have challenged the validity of the tax using a number of constitutional and statutory arguments.


There are three main arguments against the tax but also serious issues with the ability of taxpayers to comply with the law, as the statutory language is vague and lacks sufficient clarity for compliance.

First, Maryland’s tax may violate the Internet Tax Freedom Act (ITFA). The ITFA prohibits discriminatory taxes on electronic commerce. Because the tax is imposed only on digital advertising and not all advertising, there is an argument that the tax is discriminatory to ecommerce.

Further, there are questions about the tax under both the Due Process Clause and Commerce Clause of the US Constitution. There is an argument that the activities of persons subject to tax—those with global gross revenue in excess of $100 million—do not rationally relate to the incident of tax revenue from digital advertising services in the state (which is not yet defined). This use of extraterritorial receipts to determine taxability in the state may discriminate in violation of the Commerce Clause. Additionally, the tax may violate the Commerce Clause as the United States had previously taken a position against digital advertising taxes advanced in several European countries. It can be said that Maryland’s imposition of tax undercuts this US foreign policy and thus the United States would not be “speaking with one voice” as required by the Commerce Clause.

Additionally, the language as enacted poses several problems with actual compliance with the tax. The statute does not define or instruct on how to determine when revenues are “derived from digital advertising services in the state.” It could be viewed that revenue derived from digital advertising in the state is meant to capture receipts from customers in Maryland who purchase digital advertising services. It could also be argued the tax is meant to capture receipts from companies outside the state that purchase digital advertising to be shown in the state. Further, digital advertising is defined very broadly as “advertisement services on a digital interface including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” Could native advertising also be captured in that definition? Plenty of social media influencers have netted healthy cash or in-kind payments for posting sponsored content. It’s unclear how and whether this tax applies, and to whom.

Other states have proposed taxes on digital advertisements, which are at various stages of the legislative process. Indiana’s HB 1312 imposes a tax on the annual gross revenue from social media advertising services. New York’s S08056A would enact a tax on gross revenue from digital ads. West Virginia’s HB 4898 imposes a sales tax on data mining services, measured at one cent per dollar value of user data. Most states may be waiting to see how the Maryland tax plays out before making moves on either already proposed taxes or acting to propose similar taxes.


As mentioned, on February 18, 2021, several trade groups filed a complaint in the US District Court of Maryland requesting an injunctive and declaratory relief against the tax. The complaint includes many of the arguments mentioned above, as well as alleging that the tax is a penalty against tech companies, based on comments from Maryland legislators during Maryland Senate hearings. It remains to be seen whether taxpayers will be successful in challenging the tax in court.

Meanwhile taxpayers are left with the task of determining if they may be subject to the tax, and coming up with a reasonable computation for the tax due in line with the new law. Should the tax go into effect, taxpayers could face late filing or late payment penalties for not filing on time. Taxpayers may want to bolster arguments to contest penalties, and also file under protest to increase the chances of obtaining refunds should the tax be invalidated or modified. 

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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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