Maryland’s Digital Advertising Tax Is a Mess

Maryland Democrats really want to tax Big Tech. A supermajority in the state’s legislature overrode Republican Gov. Larry Hogan’s veto last week and enacted a first-in-the-nation tax on digital advertising, a market dominated by the most powerful companies in tech: Google, Facebook and Amazon, who, critics say, have historically not paid enough in taxes. Chatter about such a tax has swept across various statehouses in recent months, and Maryland is the first to pass legislation. This comes at a time when many states are cash-strapped, so the outcome will be closely watched to see if it can be replicated in other states. But critics allege that Maryland’s new law is unconstitutional, that it unduly affects news media companies, and will raise the cost of advertising services and harm small businesses that rely on cheap, targeted ads. On Thursday, the U.S. Chamber of Commerce, the Internet Association and other business and tech-focused lobbying groups sued the State of Maryland in an attempt to strike down the law, adding another hurdle to its passing. The problems with the digital tax Maryland’s law imposes a tax on digital advertising served to state residents for companies that generate over $100 million in global revenue. Companies making between $100 million and $1 billion in gross annual revenue will be taxed 2.5% on digital ad revenues, companies making $1 billion to $15 billion will be taxed at 5%, and companies making over $15 billion will be taxed at 10%. As a point of comparison, Google’s parent company, Alphabet, brought in $182 billion in revenue in 2020 to the state. The plaintiffs in the lawsuit say that the Maryland law is unlawful because it is at odds with a federal statute, the Internet Tax Freedom Act, which bars “multiple and discriminatory taxes on electronic commerce.” They also claim the law violates the Constitution's due process and commerce clauses “by burdening and penalizing purely out-of-state conduct and interfering with foreign affairs.” The new law is 'dead on arrival' and 'unenforceable.'Jeffrey A. Friedman, tax lawyer, Eversheds Sutherland The Maryland law is a “classic example of discrimination against electronic commerce,” said Jeffrey A. Friedman, a partner and tax lawyer at the firm Eversheds Sutherland, in an interview ahead of the industry lawsuit. The law only applies to digital advertising, not other forms of advertising like print. “I worked on the original enactment of the Internet Tax Freedom Act in 1998—it’s exactly the type of tax the Internet Tax Freedom Act is designed to prevent,” Friedman added, calling the law “dead on arrival” and “unenforceable.” Under the Supremacy Clause of the Constitution, a federal law takes priority over conflicting state laws. The University of Virginia law professor Ruth Mason argued in a blog post January when the bill was first introduced, that it may violate the Constitution's Commerce Clause since it essentially imposes regulations on interstate and international commerce, a role assigned to the U.S. Congress, by taxing mostly businesses based outside of Maryland. Even if it doesn't, it could impede on "the federal government's ability to 'speak with one voice' when negotiating with foreign governments," she added. Small businesses and publishers caught in the middle Advertisers, small businesses and media companies—many of which are stretched thin during the pandemic—fear that they will bear the brunt of the Maryland law and not tech giants. “The most likely scenario is that the platforms will pass through the entire tax to its customers (the advertisers), which is not the intention behind the law,” said Ruben Schreurs, group chief product officer at the marketing consultancy Ebiquity. Michael Mandel, the chief economic strategist at the Progressive Policy Institute, a liberal think tank, agrees that the tax will hurt small businesses and the state’s economy as a whole. Mandel, who has tracked advertising prices over the last few decades, said that after the emergence of digital advertising “prices really, really plunged” and “the shift to digital advertising was a real positive for consumers and advertisers.” “It just seemed to me that placing a tax on something that’s beneficial to consumers and advertisers is a bad idea,” he said. The Maryland-Delaware-D.C. Press Association, which represents news media companies based in those jurisdictions, including The Washington Post, The Baltimore Sun, and smaller print and digital publications, is fighting to get its members exempt from the law. Many of its smaller members are owned by large chains like Gannett or Tribune, which would be hurt by digital ads served in Maryland. “The media exemption is so critical because news media holds a special place,” said Rebecca Snyder, the association’s executive director. “We connect communities in significant ways, there’s precedent for carving out news media in law, and we think it’s important to recognize the role the free press plays in our communities.” Snyder opposed the law and, in a December op-ed urging the legislature not to override the governor’s veto, wrote that doing so would also be “a ‘gut-punch’ to Maryland businesses and consumers at a time when they’re already financially vulnerable.” Andrew Goode, evp of biddable media at Havas Media, said that he is not overly concerned with the Maryland law, since it seems like it will be struck down, but he takes seriously the anti-tech sentiment that undergirds the bill and similar proposals. “These companies aren’t just going to take a hit from their profitability,” Goode said. “They’re going to find some way to recoup it. And inevitably that will end up on the shoulders of advertisers.” What comes next The Maryland law must survive a tricky court battle in order to remain in place, something few expect to happen. The Trump administration opposed efforts from Europe to tax digital ad revenue and it is unclear what position the Biden administration will take. The White House did not immediately respond to a request for comment. The Maryland law, and proposals like it, come at a time when state budgets are cash-strapped. But opponents say that, while Big Tech may be an easy target, this law won't survive to actually generate the revenue the state needs. “It’s nothing other than grandstanding by some Maryland politicians who have to realize that they’re never going to generate the kind of tax revenue, if any tax revenue, that they talk about for funding Maryland education,” said Friedman. The Pink Tax Is Affecting Women-Focused Industries—Including Cannabis

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Maryland’s Digital Advertising Tax Is a Mess

Critics say the new law is unconstitutional, ineffective, and misguided. Some are suing

Scott Nover

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