Google, Facebook, Amazon, and other tech giants aren’t happy with the state of Maryland. They’ve just backed lobbyists seeking to stop Maryland from passing a new state tax on digital advertising revenue. The lobbying groups filed a lawsuit against Maryland just days after the General Assembly voted to enact the new tax over Gov. Larry Hogan’s veto.
The suit argues that the tax is unfair, unconstitutional, and incompatible with federal laws that prohibit state lawmakers from enacting taxes that target online services. Here’s everything we know about the proposed tax and the lawsuit that’s trying to kill it. 💀
What Exactly Is the New Tax?
House Bill 732 (HB 732), aka the Digital Advertising Gross Revenues Tax, will impose a tax on the gross revenues companies make from digital advertising in Maryland. 📊 The ad services defined in the bill include banner ads, search ads, and interstitial ads (those annoying full-screen ads). Here’s how the new tax will work:
0% – Businesses that make less than $100 million in a year from their global digital advertising revenues are exempt from the tax.
2.5% – Businesses with global gross advertising revenues between $100 million and $1 billion
5% – Businesses with revenues between $1 billion and $5 billion
7.5% – Businesses with global revenue up to $15 billion
10% – Any business with gross revenues that top $15 billion will be hit with a 10% tax. 🎯 That means tech titans like Google, Amazon, and Facebook are most affected by the law.
The use of global revenue to calculate what tax bracket a company falls into may sound excessive, but it’s important to note the law only imposes a tax on digital ads in Maryland that specifically target Marylanders. So if only 2% of a company’s US annual digital ad revenue comes from advertising in Maryland, then the company would owe taxes on just that 2%.
The Maryland General Assembly first approved the bill in May 2020, but Gov. Hogan vetoed it. Both chambers of the legislature have now voted to override the veto and implement the new tax. 📝
Tech firms obviously weren’t going to let the bill pass without putting up a fight. 👊 A group made up of Maryland businesses joined forces with large trade groups to form a coalition called Marylanders for Tax Fairness. The goal of the coalition is to lobby against the tax. It represents almost all large tech firms, including the Internet Association, TechNet, the Interactive Advertising Bureau (IAB), and the Internet & Television Association (NCTA).
The coalition promised to sue if Maryland’s lawmakers overrode the governor’s veto on the bill. They’re now making good on that threat and are suing the state. The effort is led by the U.S. Chamber of Commerce.
“In light of the current pandemic and economic uncertainty, increasing taxes on services used by small businesses to keep themselves running is a particularly poor and ill-time policy,” Caroline Harris, the vice president for tax policy at the U.S. Chamber of Commerce, said in a statement.
In the lawsuit, the coalition argues that the bill is not actually a tax but is instead a “punitive penalty” under federal law. Because it uses a revenue-based scale, they argue it targets behavior outside the state of Maryland and “is a highly unusual and extraordinarily severe form of extraction.”
“It’s unfortunate that the Maryland General Assembly has decided to penalize a handful of out-of-state companies with this discriminatory law. 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,” Jon Berroya, senior vice president and general counsel for the Internet Association, said in a statement.
Is Maryland Violating Federal Law?
The plaintiffs further argue that the tax violates the Internet Tax Freedom Act (ITFA), which was passed by Congress in 1998 and was subsequently renewed several times before the Obama Administration signed a permanent extension of the bill into law in 2016.
ITFA was designed to stop 🛑 states from taxing internet access services, which was cause for concern back in the 1990s. Simply put, states, counties, or cities could not impose a 5% tax on your monthly Verizon or Comcast bill thanks to this act. A handful of states tried to pass such taxes before ITFA was enacted in 1998, but they were required to phase those taxes out by 2020.
That said, ITFA does not prohibit taxes related to transactions that take place over the internet. That’s why you pay sales tax when you order stuff from Amazon or eBay. It will be up to the court to decide if Maryland’s ad sales tax is discriminatory because it specifically targets online ads and excludes advertisers in print and television. Let’s see how this plays out. 👀