Maryland’s Digital Ad Tax Under Pressure from Big Tech

After overriding a veto from Gov. Larry Hogan in February, the Maryland Legislature enacted a bill that would make Maryland the first state to tax digital advertising. A little less than a month later, lobbying groups backed by tech giants, including Amazon, Google and Facebook, are suing the state to strike down the bill.  

The tax, which applies to revenue from digital ads displayed inside the state, is based on companies’ ad sales. These ads include banner advertisements, search engine advertisements, interstitial advertisements and other advertising services.   

Companies like Google, Amazon and Facebook, according to a report by Sidley Law Firm, would be impacted as follows:

• 2.5% for companies with global annual gross revenues of $100 million through $1 billion
• 5% for companies with global annual gross incomes greater than $1 billion through $5 billion
• 7.5% for companies with global annual gross revenues greater than $5 billion through $15 billion
• 10% for companies with global annual gross revenues exceeding $15 billion

“This targeted tax on companies that make over $100,000,000 a year only from digital advertising is a vital mechanism to make sure big tech pays taxes in Maryland, just like our small businesses,” Senate President Bill Ferguson said in a Facebook post.

Analysts estimate the tax would generate up to $250 million in its first year, which Ferguson said would go toward education. 

However, Stephen P. Kranz, a partner at McDermott Will and Emery, representing the lobbying groups, said there are many problems with the law. 

“It violates the commerce clause in numerous ways,” Kranz said in a phone interview with Government Technology. “It discriminates against companies outside of Maryland that want to do business in the state. States can’t do that.”

The Internet Association’s Senior Vice President and General Counsel Jon Berroya echoed a similar message about the tax’s impact on out-of-state companies. 

“It’s unfortunate that the Maryland General Assembly has decided to penalize a handful of out-of-state companies with this discriminatory law,” Berroya said in a release. “This is a case of legislative overreach, punishing an industry that supports over one hundred thousand jobs in Maryland and contributes tens of billions of dollars to its economy each year.”

The tax, Kranz said, applies to all taxable years beginning after Dec. 31, 2020, with companies' first estimated quarterly payment due April 15.

“Regardless of whether the tax is delayed or not, the lawsuit needs to move forward,” he said. “The revenue that Maryland expects to receive is not a stable source of revenue. If money is received, it will have to be refunded from a government budget standpoint.”

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Government Technology is a sister site to Governing. Both are divisions of e.Republic.