Maryland Enacts First Digital Advertising Services Gross Receipts Tax: Now What?

By , and on February 12, 2021

General Assembly Veto Override

On February 12, 2021, the Maryland General Assembly overrode Governor Larry Hogan’s veto of HB 732 (2020) (the Act), a bill enacting a first-of-its-kind digital advertising services tax on the annual gross receipts from the provision of digital advertising services in Maryland. The tax only applies to companies having annual gross revenues (without deduction of any expenses) from all sources of $100 million or more. The rate of the tax varies, depending on the level of global annual gross revenues, from 2.5% (for companies with $1 billion or less in global annual gross revenues) to 10% (for companies with more than $15 billion in global annual gross revenue). The rate applies to gross revenues from the performance of digital advertising services in Maryland. For instance, a company subject to the 10% rate having $100 million of revenue attributable to the performance of digital advertising services in Maryland would owe an annual tax of $10 million that will be reported and paid on a quarterly basis throughout the year.

Effective Date

Even though the legislation says the tax is effective July 1, 2020, under the Maryland Constitution, vetoed legislation becomes effective the later of the effective date in the bill or 30 days after the veto is overridden. Based on today’s veto override, the bill should become effective on or about March 14, 2021. However, because the legislation is “applicable to all taxable years beginning after December 31, 2020,” the digital advertising services tax will be retroactive to the beginning of this year.

Looming Compliance Deadlines

The digital advertising services tax applies on an annual basis with a return due on or before April 15 of the following year. However, the tax also requires quarterly filing and payment for certain taxpayers. On or before April 15 of the current year, persons subject to the tax are required to file a declaration of estimated tax showing how much Maryland digital advertising services tax they expect they will owe for the calendar year. As part of the declaration and quarterly with returns filed thereafter, the Act requires that they pay at least 25% of the estimated annual tax shown on the declaration. There is a penalty of up to 25% of the amount of any underestimate of the tax. The Act also creates a fine of up to $5,000 and criminal penalties of up to five years’ imprisonment for willfully failing to file the annual return.

Filing and Guidance TBD

At the time of writing, the Maryland Office of the Comptroller has not published any of the forms necessary for making the declaration of estimated tax or the return due on April 15 of the current year. The comptroller’s office also has not adopted regulations as required by the Act, providing guidance on when advertising revenue is derived in Maryland, likely a daunting and complicated task since this is a novel question that other states have not addressed. Many aspects of the Act are vague at best and likely need to be more robustly clarified through yet-to-be-issued administrative guidance. For example, the definition of “digital advertising services” (i.e., “advertising services on a digital interface”) includes a non-exhaustive list of examples including “other comparable advertising services.” As enacted, the scope of digital advertising services remains unclear. In the absence of guidance from the comptroller on the scope of these terms, persons subject to the tax will have a difficult time figuring which revenues are subject to the tax. If the comptroller does not publish the necessary forms or issue interpretative guidance before April 15 of this year, persons subject to the digital advertising services tax will have difficulty fulfilling their new compliance obligations.

Legal Challenge Anticipated

Based on its discrimination against electronic commerce and other constitutional concerns noted below, we expect a lawsuit will be filed in federal court seeking injunctive and declaratory relief on the basis that the Internet Tax Freedom Act (ITFA) preempts the tax and it violates the US Constitution. Specifically, the suit will claim the digital advertising services tax: (1) is preempted by ITFA because it imposes a “discriminatory tax on electronic commerce,” (2) violates the dormant Commerce Clause and Due Process Clause of the Fourteenth Amendment of the US Constitution by targeting and disproportionately favoring in-state interests at the expense of out-of-state interests, (3) violates the Foreign Commerce Clause of the US Constitution by preventing the federal government from speaking with one voice, (4) is void for vagueness under the Due Process Clause of the Fourteenth Amendment and invites arbitrary enforcement and (5) violates the First Amendment by burdening protected speech (advertising) in a manner not essential to the achievement of substantial government interest. As a result of these claims, the lawsuit will ask the federal court to declare the digital advertising services tax preempted and unconstitutional and permanently enjoin the comptroller from enforcing it.

Taxpayers with obligations for the new digital advertising services tax should explore options for protecting any rights to refunds of estimated tax payments should the legal challenge succeed. Companies seeking more information about the legal challenge and steps needed to preserve their refund rights under Maryland law are encouraged to contact the authors directly.

Tweaks on the Horizon

The sponsors of the digital advertising services tax recently introduced amendments (HB 1200 and SB 787) that would exclude radio and television broadcasters and news media entities from the scope of the tax. The amendment also would ban those subject to the tax from passing the tax on to customers through a separate fee, surcharge or line item on the invoice. These amendments are still early in the legislative process but are on a fast track and could become law prior to the initial return and payment due date in a few months. Stay tuned for more details as these companion bills advance.

Practice Note: The reporting and payment deadlines for the new digital advertising services tax enacted today loom, and there are many unanswered questions and finer details with regard to the scope and application of this first-of-its-kind state tax. With legal challenges anticipated and guidance on many key elements of the new tax needed for compliance lacking, we anticipate a challenging compliance process and a clear need for legal counsel to assist with navigating this new tax. Unfortunately, Maryland is not the only state to recently consider a digital advertising services tax. In fact, at least six additional states (Connecticut, Indiana, Montana, New York, Oregon and Washington) are actively considering the same or similar legislative proposals as part of their current legislative sessions. A successful lawsuit will chill efforts in those other states.

Companies who believe they may be subject to the Maryland digital advertising services tax should contact the authors immediately to discuss their potential compliance obligations created by the Maryland General Assembly’s February 12, 2021, action overriding Governor Hogan’s veto of the Act.

Stephen 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 Kranz's full bio.


Mark Nebergall
Mark Nebergall advises clients on all aspects of tax policy with respect to software transactions at state, federal and international levels. He also works with McDermott’s tax controversy team handling tax litigation where he brings his former experience as a litigator for the US Department of Justice, Tax Division. Mark combines tax policy and tax litigation skills to help solve client tax problems holistically. Read Mark Nebergall's full bio. 


Eric D. 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.

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