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Maryland enacts first-in-the-nation digital advertising tax

February 2021


Maryland has enacted the nation’s first tax targeting digital advertising, as the House on February 11 and the Senate on February 12 overrode Governor Larry Hogan’s (R) veto of 2020 H.B. 732.

Maryland’s new tax applies to annual gross revenue derived from digital advertising in the state and is imposed at scaled rates between 2.5% and 10% (beginning with taxpayers that have at least $100 million of global annual gross revenue). Further, a return is only required from a person that has annual gross revenue derived from digital advertising services in Maryland of at least $1 million. As noted below, questions of interpretation arise under the new law.

Under the Maryland Constitution, veto override legislation is effective 30 days after the override vote (here, March 14, 2021). However, litigation is anticipated, and taxpayers challenging the tax are likely to seek an injunction pending the result of the litigation. Further, the tax itself could be amended by the General Assembly, as legislation is proposed that would adjust the levy, including restricting the ability to pass the tax directly on to customers.

The takeaway

The Department of Legislative Services’ Fiscal and Policy Note on the legislation discusses potential legal challenges to the tax which could block its application, including claims based on the US Constitution’s Commerce Clause, First Amendment, and the federal Internet Tax Freedom Act.

Pending the outcome of any such litigation, however, digital advertising service providers must consider their obligations under the new law, and business customers must determine what are the appropriate tax costs added to the purchase price of such services. Determining which services are subject to tax and at what rate will be challenging for seller and purchaser alike.

Pending legislation (S.B. 787 and HB. 1200) would exempt digital advertising by a ‘broadcast entity’ or a ‘news media entity.’ Further, the proposed legislation provides that the digital advertising tax may not be “directly pass[ed] on” to the customer by means of a separate fee, surcharge, or line item. Taxpayers may have to comply with the provisions of H.B. 732 and subsequently adjust for these provisions depending on the timing of legislative action (and any amendments to these bills).

Finally, other states are likely to take notice of Maryland’s action. There are similar digital advertising gross revenue tax bills pending in other states, in addition to proposals to impose the sales and use tax on digital advertising, social media advertising taxes, and taxes on sales of personal information.

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Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

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