Maryland’s Latest Attempt to Fix its Digital Ad Tax May Lead to More Litigation

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Akerman LLP - SALT Insights

Shortly after Maryland passed the country’s first “Digital Advertising Gross Revenues Tax,” H.B. 732, the Maryland Senate went to work attempting to fix a few known glitches in the law. Senate Bill 787, passed the Maryland Senate unanimously on March 5, 2021, and is scheduled for a hearing in the Maryland House on March 25, 2021.

The bill contains a provision intended to prevent large online companies from directly passing along the cost of the digital advertising tax. The bill seeks to prevent this by prohibiting companies from adding a separate fee, surcharge or line item to cover the tax.

However, as previously discussed, this measure may not have much of a practical impact on the ability of large companies to pass the burden on to customers indirectly through pricing, thwarting the state’s goal of preventing smaller customers from bearing the burden of this tax.

Further, on top of the constitutionality and legality issues currently being litigated with respect to the new law, this pass-through provision raises additional constitutional concerns under the First Amendment and the Dormant Commerce Clause. Under similar circumstances, the Sixth Circuit previously held that a provision prohibiting providers from identifying a tax on the customer’s bill violated the First Amendment of the U.S. Constitution. See BellSouth Telecommunications Inc. v. Farris, 542 F.3d 499 (6th Cir. 2008). The Court in that case invalidated on constitutional grounds a Kentucky tax provision that prohibited telecommunication providers from identifying a tax on bills to customers. The Court held that prohibiting a taxpayer from separately identifying a tax on its bill violated the free speech clause of the First Amendment, even if the provision arose on account of the state’s substantial interest in avoiding customer confusion over who was legally responsible for the tax. Thus, it is questionable whether the state may limit the ability of a company to separately state the tax on its invoice, and it likely is another aspect of this law that will end up in the courts.

The other two provisions contained in the Senate bill are helpful to taxpayers. For instance, the bill would delay the effective date of the digital advertising tax from January 1, 2021 (retroactive) to January 1, 2022, which would give the Comptroller time to provide much needed clarity on some of the ambiguous language in the new law.

The bill also exempts news media companies (i.e., companies engaged “primarily in the business of newsgathering, reporting or publishing articles about news, current events, culture or other matters of public interest”).

Despite its flaws, the unanimous passage of this bill by the Senate makes it likely that the House will pass it as well. Ultimately, the bill does not go far enough to fix the many known issues in the new law, but the delayed effective date alone is welcome news to taxpayers seeking to clarify their compliance obligations.

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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