The Maryland Comptroller appears to have denied all refund claims for the 2022 digital advertising gross revenues (DAGR) tax! The denial notices were seemingly dated on or around October 11, 2023, and were sent via certified mail two weeks ago. The denial notices require immediate action by taxpayers.
Winter is coming, and so are denials of taxpayer refund claims for return of the illegally extracted Maryland digital ad tax (DAT). Sources in Annapolis report the Maryland Comptroller is preparing denial notices imminently. Taxpayers need to be prepared for quick action once that happens.
According to our intelligence, the denial letters will inform recipients they have 30 days from the date of the notice to petition the Maryland Tax Court for review of the claim denial. Previously, we believed most taxpayers would be shunted to administrative hearings and appeals on their refund claims to wait it out, but it appears that is no longer the case.
Depending on a particular taxpayer’s facts and circumstances, the 30-day ticket to Tax Court may be suspect. Additionally, there may be steps a taxpayer can take now to head off an immediate trip to Tax Court. If you filed a refund claim and want to get to Tax Court quickly, this is all good news. If you filed a refund claim and want to let others litigate ahead of you (knowing that there are two pending lawsuits challenging the DAT), quick action before your refund claim is denied may prevent Comptroller action.
Keep in mind, interest due to you on your refund claim is tied to the date on which you filed the claim and is currently 9% per year.
Taxpayers should immediately evaluate how they perfected their DAT refund claim and whether the refund claim demanded that the Comptroller conduct a hearing. Unless you are prepared to go to Tax Court immediately, there are steps you can take now before your claim is disallowed. If you have already received a notice of disallowance, please contact us to discuss your options.
Maryland Attorney General’s Office Says Taxpayers May Inform Customers of Increased Charges Resulting from Digital Advertising Tax
In a brief filed on April 29, 2022, the Maryland Attorney General’s Office (Attorney General) agreed that the “pass-through prohibition” of the state’s digital advertising tax “does not purport to impose any restriction on what the taxpayer may say to the customer, or anyone else, about” increased billing charges because of the tax.
Last year, Maryland lawmakers enacted a first-of-its-kind digital advertising tax on the annual gross receipts from the provision of digital advertising services. The tax only applies to companies with annual gross revenues of $100 million or more. Shortly thereafter, Maryland lawmakers added a pass-through prohibition, which provides that “[a] person who derives gross revenues from digital advertising services . . . may not directly pass on the cost of the [tax] to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.”
In litigation brought by McDermott Will & Emery in Maryland federal court, several leading trade associations have challenged the pass-through prohibition on the basis that it violates the First Amendment of the US Constitution by regulating how sellers may communicate their prices on invoices, billing statements and the like. However, in a brief seeking dismissal of the litigation, the Attorney General claimed that the pass-through prohibition does not regulate speech but instead only prohibits the “conduct of directly passing through to a customer” the tax burden.
Highlighting what it agrees to be the limited scope of the pass-through prohibition, the Attorney General states as an “example” that if a “taxpayer wishes to inform [a] customer that [an] invoiced charge is higher than it might otherwise be due to the imposition of the digital ad tax, the taxpayer is free to communicate that or any other message.” (Emphasis added). Further, the Attorney General agrees that “if the taxpayer wants to use the invoice as an opportunity to engage in political speech, the taxpayer is free to express its displeasure with the tax and identify who bears political responsibility for [the] new tax.”
Consistent with this position, the Attorney General does not dispute that the digital advertising tax may be reflected in the amounts charged to customers. Instead, the Attorney General argues that the pass-through prohibition is a “prohibition against direct, as opposed to indirect, pass-through of the tax cost,” which is intended to ensure that the taxpayer’s “annual gross revenues” subject to the tax “reflect the full amount of revenues received from customers, undiminished by any tax costs that the taxpayer might otherwise have preferred to pass directly to the customer.”
The parties are scheduled to file additional briefs in the case on May 13, 2022. The case is Civil No. 21-cv-410 (D. Md., filed February 18, 2021). Sarah P. Hogarth, Paul W. Hughes, Michael B. Kimberly and Stephen P. Kranz, partners in McDermott’s Washington, DC, office, represent the plaintiffs.
On December 3, 2021, the Maryland Comptroller published notice of its adoption of the digital advertising gross revenues tax regulations (which was originally proposed on October 8, 2021). Per the Maryland Administrative Procedure Act, the final adopted regulations will go into effect in 10 calendar days, or December 13, 2021. (See Md. Code Ann., State Gov’t § 10-117(a)(1).)
The final regulations were adopted almost entirely as proposed, with just two minor changes that the Attorney General (AG) of Maryland certified as non-substantive. Specifically, the changes to the October 8 proposed regulations concern the information that may be used to determine the location of a device and are described by the AG as follows:
- Regulation .02(C): The Comptroller is clarifying language regarding the allowable sources of information a taxpayer may use to determine the location of a device. Specifically, this final action amendment changes “both technical information and the terms of the underlying contract” to “both technical information and nontechnical information included in the contract.”
- Regulation .02(C)(2): The Comptroller is amending the non-exhaustive list of technical information to include “industry standard metrics.”
Practice Note: While “industry standard metrics” is a nice addition to the list of sources that may be used to determine the location of devices for sourcing purposes, significant and fundamental questions and concerns submitted as part of the comments were not addressed by the Comptroller in adopting the final digital ad tax regulations. The tax is subject to multiple lawsuits (both state and federal court) and pending a court order to the contrary is scheduled to take effect beginning January 1, 2022, with the first filing obligation for large taxpayers in April 2022. Taxpayers grappling with how to comply with this new tax are encouraged to contact the authors.
On the morning of Friday, February 26, 2021, the Maryland Senate Budget and Taxation Committee added a new item to its agenda for the hearing later that morning. The new item was proposed amendments to Senate Bill 787, a bill that would amend the Maryland Digital Advertising Tax by excluding broadcasters and news media and preventing service providers from directly passing the tax through to customers. One of the amendments would change the tax years to which the tax applies from tax years beginning after December 31, 2020, to tax years beginning after December 31, 2021. The amendment passed on a voice vote.
The amendment was sponsored by the bill’s author, Senate President Bill Ferguson. Senator Ferguson was also the chief proponent of the Digital Advertising Services Tax. A companion bill, House Bill 1200, sponsored by House Majority Leader Eric Luedtke, came up for a hearing in the House Ways and Means Committee later that day, but only testimony from supporters of the two carve-outs was received. No amendments were offered, and no votes were taken.
Because the amendment delaying the implementation of the Digital Advertising Services Tax is coming from the Senate’s president, we believe its passage a near certainty. This amendment, if passed, would not delay the effective date of the tax, it would only change the tax year to which it first applies from 2021 to 2022.
Today, McDermott Will & Emery filed suit in Maryland federal court on behalf of a number of leading trade associations against Maryland Comptroller Peter Franchot, challenging the state’s recently enacted 10% gross receipts “tax” applicable to digital advertising revenue. The plaintiffs in the suit are the US Chamber of Commerce, the Internet Association, NetChoice and the Computer and Communications Industry Association. The suit asks that the court invalidate Maryland’s punitive imposition as violating several provisions of the US Constitution and the Internet Tax Freedom Act.
A file-stamped copy of the complaint is available below:
The complaint alleges that Maryland’s focus on internet advertising services (the tax does not apply to traditional advertising) discriminates against the internet, violating the Internet Tax Freedom Act. Next, because Maryland’s new law burdens and penalizes conduct occurring outside Maryland, it violates the Commerce and Due Process Clauses of the US Constitution. The complaint alleges that the characteristics of the imposition and the circumstances surrounding its enactment demonstrate a clear purpose and intent to punish out-of-state digital advertising companies for their extraterritorial activities.
The case is Civil No. 21-cv-410 (D. Md., filed February 18, 2021). Michael B. Kimberly, Paul W. Hughes, Stephen P. Kranz and Sarah P. Hogarth of McDermott, Will & Emery’s Washington, DC, office represent the plaintiffs.
Practice Note: The filing of this suit sends a signal to other states, like New York, Connecticut and Montana, where similar proposals are under consideration. Policymakers in those other states should recognize that following Maryland’s lead will only lead to the courthouse.
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.
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 [...]
On May 8, Washington’s 1.2% surtax on “specified financial institutions” (banks with at least $1 billion a year in net revenue) was struck down by a King County Superior Court judge. Judge Marshall Ferguson ruled that the tax, which is imposed on top of all other taxes, violates the Commerce Clause of the US Constitution by discriminating against out-of-state banks in both purpose and effect.
In their briefs, attorneys for the Washington Bankers Association and American Bankers Association explained that an out-of-state bank would pay a much higher tax rate (and be at a competitive disadvantage) compared to an in-state bank because its global revenue is sufficient to trigger owing the surtax. The associations presented evidence that every bank meeting the definition of “specified financial institution” was an out-of-state bank, and that no in-state bank met the definition. Further, they pointed to statements by legislators appearing to show an intent to promote “local banks” and address a national wealth disparity and regressive taxation.
The state responded that the surtax is neutral on its face, applying to all businesses with $1 billion regardless of their headquarters location, and that none of the funds were used to subsidize or reduce tax burdens on in-state banks. They also argued that the tax should be presumed constitutional and rejected the plaintiffs’ standing to sue as associations. The actual effect of discrimination seemed especially persuasive to Judge Ferguson, who asked counsel for the state, “If the tax so clearly falls on non-Washington businesses, is that not a discriminatory effect?”
The state may appeal the case, Washington Bankers Association et al. v. State of Washington et al., No. 19-2-29262-8, to the Washington Supreme Court.
Practice Note: The structure of the tax struck down in this case, a surtax imposed only if the company’s global income exceeds a high threshold, has been on the rise. San Francisco’s gross receipts tax on businesses with over $50 million in receipts, Portland’s clean energy surcharge on businesses with over $1 billion in national gross revenue, and Maryland’s proposed digital advertising tax based on a sliding scale of global revenue all come to mind. This ruling may be the first sign that judges will not be afraid to subject such taxes to scrutiny under Commerce Clause analysis.
New State Digital Ad Taxes? Will Maryland’s Take Effect? Which States Will Follow? Litigation Guaranteed!
On March 18, 2020, Maryland legislature sent a massive new tax on digital advertising services to Governor Hogan for consideration. The tax imposes a rate of up to 10% on annual gross revenue in the state derived from digital advertising services. This tax is on a sliding scale based on companies’ global revenues and would take effect with tax year 2021. There are many legal problems with the legislation, including the violations of the Internet Tax Freedom Act, the Commerce Clause and the First Amendment. Other states have considered and are considering similar proposals. It is imperative that companies know how broadly this new tax will apply.
Click below to watch our recent webinar on this new tax. We discuss the legal challenges that can be made and how to protect your company from the unlawful reach of such laws.
Maryland General Assembly Sends Digital Advertising Tax to Governor; Nearly Identical Bill Pending in New York
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.