Maryland General Assembly Sends Digital Advertising Tax to Governor; Nearly Identical Bill Pending in New York

By and on March 18, 2020

With gatherings larger than 50 people banned and the State House cleared of visitors, on March 18, 2020, Maryland’s legislature approved HB 732, which contains a massive new punitive tax on digital advertising services, and sent it to Governor Larry Hogan (R) for his consideration.

Digital Advertising Gross Revenues Tax

Contradicting the clear legislative trend in the advertising space to exempt the facilitation of advertising services (but tax the consumer transactions that may result therefrom), HB 732 would impose a new, one-of-a-kind tax on the annual gross revenue of digital advertising services that are deemed to be provided in the State. The proposed tax contains a tiered tax rate structure (arbitrarily determined based on the advertising service provider’s global annual gross revenues) that would allow for a tax rate of up to a whopping 10% of the annual gross revenue in the State derived from digital advertising services. As passed, HB 732 would take effect July 1, 2020, and the new tax would apply to all taxable years beginning after December 31, 2020.

If Governor Hogan’s anticipated veto is overridden, Maryland would become the first state or locality in the United States to impose a targeted punitive tax on the gross revenue of digital advertising services. While the bill originally taxed digital advertising services based on the user’s IP address, as passed, the bill contains a vague directive to the Comptroller to develop an apportionment methodology (or really, a sourcing methodology). The digital ads tax applies at the following sliding scale:

  • 2.5% for person with global annual gross revenues of $100 million or more
  • 5% for person with global annual gross revenues of $1 billion or more
  • 7.5% for person with global annual gross revenues of $5 billion or more
  • 10% for person with global annual gross revenues of $15 billion or more

Legal Concerns Galore

Because Maryland would tax digital advertising but not non-digital advertising, the tax is a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (ITFA). The Maryland Attorney General’s office, asked to evaluate the digital advertising service tax proposal under their lenient “not clearly unconstitutional” standard, found “some real risk that [the law] would be held preempted” under ITFA because the tax applies to only digital advertising revenue. The Attorney General’s memo continued: “If the reviewing court found that the relevant ‘transaction’ being taxed for purposes of the ITFA is the transmission of digital advertising to a user, then that transaction would presumably be one that occurs over the internet or through internet access, and the tax would likely be preempted by the ITFA, unless advertising over the internet is different enough from advertising by other means that the two types of advertising would not qualify as transactions of sufficiently ‘similar’ services.”

The use of an arbitrary threshold of global annual gross revenues, while perhaps politically popular, serves to tax larger global advertising service providers at a higher tax rate than their domestic counterparts, in violation of the Commerce Clause of the US Constitution.

The proposal also raises potential First Amendment issues (since the proposal would regulate political, ideological and commercial speech) and Equal Protection Clause issues (lack of a rational basis for punitive tax on advertising provided via a digital interface). The Maryland Attorney General’s memorandum acknowledged that “the proposed tax would not be the least restrictive means to raise revenue for education,” and that an argument could be made that it “‘singles out’ a First Amendment interest for a special tax.” The memorandum suggested a safe harbor to avoid First Amendment concerns: “to include a tax on digital advertising services as a part of a more broadly applicable gross receipts or sales tax on a wider array of goods and/or services.” However, that suggestion was not incorporated in the General Assembly’s final bill.

New York Copycat Bill

In New York, an identical bill (S. 8056) was introduced on March 13, 2020. Like Maryland’s legislation, the New York bill broadly defines “digital advertising services” to include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” But unlike the Maryland proposal, the New York bill appends language to the end of the definition, limiting it to just digital advertising services “that use personal information about the people the ads are being served to.”

The proposed New York tax would be apportioned, drawing on language from the Maryland bill, with the numerator consisting of “revenues of a person derived from digital advertising in the state” and the denominator consisting of “revenues of a person derived from digital advertising in the United States.” The comptroller is directed to “adopt regulations to determine the amount of revenue derived from each state in which digital advertising services are provided.” The New York proposal references “comptroller” throughout in areas where the state revenue agency should be referenced (i.e., the New York Department of Taxation and Finance). Presumably, this error is due to the fact that the proposal was largely copied from Maryland, where the comptroller is the tax administrator. If passed without a legislative fix, this oversight could have major implications on how New York administers taxes and place a substantial burden on the Office of Comptroller, which does not currently administer similar taxes in New York.

Practice Note: If ultimately enacted, the Maryland and New York bills would impose an uncharted and sweeping new tax on digital advertising platforms that will have trickle-down effects on advertisers and in-state consumers. Businesses impacted by these troubling proposals are encouraged to contact the authors to discuss these legislative developments and potential legal challenges in more detail.

Eric CarstensEric Carstens
  Eric D. Carstens focuses his practice on state and local tax matters, assisting clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. Eric engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm's taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property. Read Eric D. Carstens' full bio.


Stephen P. KranzStephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen P. Kranz's full bio.

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