Maryland, Nebraska, and New York each introduced a digital ad tax bill during the 2020 legislative session.[1] Maryland’s digital ad tax bill imposes a tax on “annual gross revenues of a person derived from digital advertising services in the State and the annual gross revenues of a person derived from digital advertising services in the United States.”[2]

Since the introduction of digital ad taxes, Maryland has been the only state to ratify their digital ad tax bill by overriding Governor Hogan’s (R) veto during the 2021 legislative session.[3] As the first state to enact such a bill, Maryland leads the nation in what is expected to be a sweeping enactment of similar bills.[4] However, businesses frustrated with Maryland’s digital ad tax may try to challenge it under the federal Permanent Internet Tax Freedom Act (PIFTA) which became effective in July 2020.[5] PIFTA, an amendment to the Internet Freedom Act (IFTA) of 1998, is a law that “prevents states from imposing taxes on things like actually accessing the internet,” but, importantly, does not “have anything to do with eCommerce sales.”[6]

Lawmakers have long endeavored to reap the tax benefits of large advertising firms and social media platforms generating revenue in their jurisdictions.[7] Unchecked, tech giants like Facebook and Google have dominated the internet and, in large part, played a major role in guiding discourse among US citizens.[8] Imposing a digital ad tax on activities carried out online by similar companies would require that they pay a percentage of their gross annual revenue derived from digital advertising services to the state.[9] The tax requires larger companies with higher gross revenues to pay a higher percentage of the revenue derived from digital advertising in their annual taxes.[10]

The taxes will be levied at “2.5% of the assessable base for a person with global annual gross revenues of $100.0 million through $1.0 billion;” and increased incrementally to up to “10% of the assessable base for a person with global annual gross revenues exceeding $15.0 billion.”[11] Smaller firms making less than $100 million per year through digital ads will not be subject to the tax.[12]

The bill, aimed also at quelling the barrage of digital advertising perpetuated by marketing firms and social media platforms, represents an important step toward holding big tech responsible for their activities and revenue streams generated through online advertising. Issues associated with digital advertising includes ads designed as clickbait, consumer data tracking, invasiveness, annoyance, and the spread of misinformation.[13]

Widespread legal challenges to the bill are expected, as marketing firms and tech companies will likely seek an injunction before the bill goes into effect in October 2021.[14] However, while Maryland’s digital ad tax may be subject to Dormant Commerce Clause challenges, it will likely survive challenges under PIFTA because taxes imposed on internet advertising arguably falls outside of PIFTA’s purview.

Cooper Gerus is a third-year student at the University of Baltimore School of Law and a Staff Editor for Law Forum. Cooper received a Bachelor of Arts degree in political science with minors in English communications and psychology from Lebanon Valley College. Before attending law school, Cooper completed an AmeriCorps VISTA service year in Spartanburg, SC where he worked for a farmer’s market and urban farm. Cooper has interned with the Lebanon County Office of the Public Defender, the Baltimore City District Court Re-Entry Project, and the Equal Employment Opportunity Commission. Cooper enjoyed participating in the University of Baltimore Students for Public Interest (UBSPI) during law school. In August 2021 Cooper will take on a clerkship with the Hon. Elizabeth S. Morris in the Circuit Court for Anne Arundel County.

[1] Roxane Bland, Taxing Digital Advertising: Its Time Has Not Yet Come, Forbes (May 1, 2020), https://www.forbes.com/sites/taxnotes/2020/05/01/taxing-digital-advertising-its-time-has-not-yet-come/?sh=48a433493bdf.

[2] H.B. 732, 441st Gen. Assemb., Reg. Sess. (Md. 2020)[hereinafter “H.B. 732”].

[3] Maryland Enacts First-in-the-Nation Digital Advertising Tax, PwC (Feb. 2020), https://www.pwc.com/us/en/services/tax/library/maryland-enacts-first-in-the-nation-digital-advertising-tax.html.

[4] Id.

[5] Toby Bargar, Controversial Internet Tax Freedom Act Becomes Permanent July 1, Avalara (Jun. 12, 2020), https://www.avalara.com/us/en/blog/2020/06/controversial-internet-tax-freedom-act-becomes-permanent-july-1.html.

[6]  Jennifer Dunn, What the Internet Tax Freedom Act Means for eCommerce Businesses, TaxJar (Jan. 11, 2021), https://blog.taxjar.com/internet-tax-freedom-act/.

[7] Paul Romer, A Tax That Could Fix Big Tech, New York Times (May 6, 2019), https://www.nytimes.com/2019/05/06/opinion/tax-facebook-google.html.

[8] Id.

[9] H.B. 732.

[10]  Id.

[11] Id.

[12] Id.

[13] Romer, supra note 7.

[14] David Shepardson, Internet groups, U.S. Chamber Sue Maryland over Digital Advertising Tax, Reuters (Feb. 18, 2021), https://www.reuters.com/article/us-usa-internet-maryland/internet-groups-u-s-chamber-sue-maryland-over-digital-advertising-tax-idUSKBN2AI2VM.