As many of us last year sat on our couches eating snacks and surfing the web for our daily necessities, the Maryland legislature got creative in how to derive additional tax revenue from our Internet website shopping addictions.

In early February 2021, the Maryland legislature created a new tax on digital advertising, overriding Governor Larry Hogan’s veto. Maryland tax code §7.5-102 states that the tax will be “imposed on annual gross revenues of a person derived from digital advertising services in” Maryland, with a threshold established of $1 million as described in further detail below. Digital advertising services covered by this new law include advertisements you see as you visit websites on Google Chrome, Microsoft Edge, Safari or other browsers; advertisements placed on specific websites or software; and advertising banners, “pop-ups,” and other similar items that follow you around on your Internet travels.

This statute also includes an apportionment fraction: a business’s annual gross revenues from Maryland digital advertising services over the company’s entire digital advertising services must be tracked and calculated. All of the details surrounding the tax are expected to be issued by the Maryland Comptroller during the year, including how to determine whether revenue is derived from digital advertising services within Maryland.

As the law currently stands, businesses subject to the tax threshold were required to declare and pay at least 25% of the Digital Ad Tax by April 15, 2021. However, Maryland Senate Bill 787 still sits on Governor Hogan’s desk, which would push the start of the tax until 2022 and delay the April 15th deadline. Therefore, businesses are left hanging on the appropriate actions to take.

The Maryland Digital Ad Tax

Maryland Tax Code §7.5-201(a) states that an entity will be required to file a return if they have annual gross digital advertising revenues derived from Maryland of at least $1 million and submit the return by April 15 of the following year. Additionally, the law requires an entity or individual to make a declaration of estimated tax by April 15th of that tax year if they “reasonably expect” the annual gross revenues from digital advertising services to exceed $1 million. Further, that entity or individual will have to file quarterly estimated tax returns throughout the current tax year.

While the tax will only apply to gross advertising revenue generated in Maryland, the state tax code uses a graduated scale based on global gross revenues of a business.

• Global annual gross revenues of $100 million - $1 billion, the tax rate is 2.5%
• Global annual gross revenues of $1 billion - $5 billion, the tax rate is 5.0%
• Global annual gross revenues of $5 billion - $15 billion, the tax rate is 7.5%
• Global annual gross revenues of over $15 billion will pay the tax at a 10% rate

This means a business or individual might still have to file a “zero” return or an information return should their global annual gross revenues not reach $100 million. While the bill was sold to Marylanders as a way to tax large companies who avoid paying their fair share of Maryland taxes, the tax most likely will disproportionally impact smaller businesses inside of the state. Now more than ever, small businesses are relying on digital advertisements to drive consumers to their online stores. Unless the recently passed S.B. 787 is signed into law, nothing prevents Google or Facebook from tacking this tax onto a small business’s advertising bill. Even if the law is amended, small businesses will see the overall cost of digital advertising increase.

Connecticut, Indiana, Montana, and New York are considering similar measures, but Maryland is the first state to actually pass such a bill. With Maryland potentially reaping $200 million in additional revenue from this tax, it will be the test balloon for other states who surely are hungry for similar revenue, which will definitely take a bite out of corporate profits for those who hit the requisite thresholds.

Several Maryland businesses have filed lawsuits challenging the law, claiming it violates the Permanent Internet Tax Freedom Act (PITFA). The Internet Tax Freedom Act (“ITFA”) was first passed in 1998, but a subsequent law signed by then-President Trump added the adjective “permanent.” Whether the extra “P” is enough to withstand legal challenge is soon to be seen. Just like its predecessor, the PITFA prevents states from imposing a tax for accessing the internet. The law also prevents the states from imposing an alternative or additional tax on an electronic good or service that is not assessed on goods or services purchased from a brick-and-mortar store.

An additional challenge to this Maryland statute is the U.S. Chamber of Commerce, which, along with several other trade organizations, has filed suit claiming the tax “is a punitive assault on digital, but not print advertising.” The complaint argues that instead of targeting large national businesses, which is the purported purpose of the law, it will instead “harm Marylanders and small businesses and reduce the overall quality of internet content--all while doing nothing to stave off the dissemination of misinformation and hate speech.”

The outcomes of these legal challenges clearly have major stakeholders chomping at the bit on both sides, with billions of dollars at stake. Will these funds be pouring into state coffers, or remaining in private corporate bank accounts?

While the tax world sits back and watches with popcorn in hand, if you have any questions about how this new law and its complicated deadlines, or any other state or federal tax laws might impact your business or personal interests, please remember that the Tax Team at Bailey Glasser stands ready to assist.