The Maryland Digital Advertising Tax
A Maryland authorities tribunal invalidated the state’s first-in-the-nation taxation connected integer advertizing (Maryland Digital Advertising Tax) earlier this week.1 Enacted successful February 2021, the Maryland Digital Advertising Tax was arguable adjacent earlier it became law. The authorities authorizing the taxation was vetoed by Maryland Gov. Larry Hogan successful 2020 and was enacted lone aft the Maryland House of Delegates and the Maryland Senate voted to override the veto successful aboriginal 2021.
The Maryland Digital Advertising Tax is imposed connected businesses with astatine slightest $100 cardinal successful planetary gross and $1 cardinal successful gross receipts from integer advertizing services successful Maryland.2 The taxation applies to the yearly gross revenues of a concern derived from integer advertizing services successful Maryland. Maryland does not taxation nondigital advertising. The word “digital advertizing services” is defined to see “advertisement services connected a integer interface, including advertisements successful the signifier of banner advertising, hunt motor advertising, interstitial advertising, and different comparable advertizing services.” The word integer interface is defined arsenic “any benignant of software, including a website, portion of a website, oregon application, that a idiosyncratic is capable to access.”3
The complaint of taxation imposed by the Maryland Digital Advertising Tax is determined by notation to a taxpayer’s yearly gross revenues. For taxpayers with planetary yearly gross revenues betwixt $100 cardinal and $1 billion, the taxation complaint is 2.5% of the integer advertizing services successful Maryland. For taxpayers with planetary yearly gross revenues betwixt $1 cardinal and $5 billion, the taxation complaint is 5% of the integer advertizing services successful Maryland. For taxpayers with planetary yearly gross revenues betwixt $5 cardinal and $15 billion, the taxation complaint is 7.5% of the integer advertizing services successful Maryland. For taxpayers with planetary yearly gross revenues greater than $15 billion, the taxation complaint is 10% of the integer advertizing services successful Maryland.4
Legal Challenges to the Tax
Shortly aft enactment, the Maryland Digital Advertising Tax was challenged successful authorities and national courts successful Maryland.
Hours aft the authorities was passed, the U.S. Chamber of Commerce and respective commercialized associations, including the Computer & Communications Industry Association, filed a national suit successful the U.S. District Court for the District of Maryland.5 The national lawsuit has been afloat briefed and awaits oral statement and a decision.
In April 2021, 7 divisions of Comcast and Verizon Media Inc. filed a suit successful Maryland Circuit Court challenging the Maryland Digital Advertising Tax nether the Internet Tax Freedom Act (ITFA) and the U.S. Constitution’s owed process clause, commerce clause and First Amendment. After caller oral statement connected pending summary judgement motions successful mid-October, the Maryland Circuit Court (Judge Alison L. Asti) ruled from the seat successful favour of Comcast and Verizon. Although a written bid volition beryllium forthcoming, Judge Asti held that the Maryland Digital Advertising Tax violated ITFA arsenic good arsenic the commerce clause and the First Amendment of the Constitution.
Significance of the Maryland Circuit Court’s Decision and ITFA’s Nondiscrimination Rule
Maryland is not the lone authorities to precocious see a taxation connected integer advertizing revenue. The Maryland Circuit Court’s determination and forthcoming bid invalidating the Maryland Digital Advertising Tax volition surely pass if and however different states beforehand authorities enacting caller taxes connected advertizing gross sourced to their jurisdictions.
The value of the decision, however, is broader than its effect connected however advertisements are taxed. The Maryland Circuit Court’s determination identifies the perils that each digital-transaction taxation statutes volition face and the value of the nondiscrimination proviso successful ITFA to taxpayers challenging specified laws.
ITFA was enacted successful 1998 to supply a three-year moratorium connected some (i) caller authorities taxes connected net work and (ii) “multiple oregon discriminatory taxes connected physics commerce.”6 The three-year moratorium was subsequently extended to November 1, 2003;7 to November 1, 2007;8 to November 1, 2014;9 to December 11, 2014;10 and done October 1, 2015.11 On February 24, 2016, the moratorium was permanently extended.12 Unless and until the authorities is repealed oregon materially amended, ITFA volition proceed to prohibit immoderate caller authorities taxes connected net work and immoderate authorities taxes that are either a “multiple tax”13 oregon a “discriminatory tax”14 connected “electronic commerce.”15 In summary, these ITFA rules prohibit a authorities from enacting (among different taxation statutes):
- a taxation that results successful the aforesaid net transaction being taxable to taxation successful much than 1 jurisdiction without an offsetting credit;
- a taxation imposed connected net transactions that is not imposed connected transactions accomplished done different means;
- a taxation that imposes a higher complaint of taxation connected net transactions than is imposed connected transactions accomplished done different means; or
- a taxation that imposes immoderate postulation oregon outgo obligations for net transactions that are antithetic from the postulation and/or outgo obligations connected transactions accomplished done different means.
For its archetypal 25 years, ITFA did not play a salient relation successful litigation involving authorities and section taxes (SALT). In airy of the expanding value of integer commerce, the governmental and fiscal pressures that gave emergence to the Maryland Digital Advertising Tax and the value of the statue successful the caller Maryland litigation, ITFA’s dormancy is apt over. Both states and taxpayers should hole for ITFA to play an important relation successful the solution and adjudication of SALT controversies.
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1 Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, lawsuit fig C-02-CV-21-000509, successful the Circuit Court for Anne Arundel County, Maryland.
2 Md. Tax Law. 7.5-103, 7.5-201.
3 Md. Tax Law 7.5-101.
4 Md. Tax Law 7.5-103.
5 U.S. Chamber of Commerce et al. v. Peter Franchot, Case fig 1:21-cv-00410 (U.S.D.C., D. Md.).
6 105 P.L. 277, Section 1101(a), Oct. 21, 1998.
7 107 P.L. 75, Nov. 28, 2001.
8 108 P.L. 435, Dec. 3, 2004.
9 110 P.L. 108, Oct. 31, 2007.
10 113 P.L. 164, Sept. 19, 2014.
11 113 P.L. 235, Dec. 16, 2014.
12114 P.L. 125, Feb. 24, 2016.
13 The word “multiple tax” is defined arsenic immoderate taxation “that is imposed by 1 State oregon governmental subdivision thereof connected the aforesaid oregon fundamentally the aforesaid physics commerce that is besides taxable to different taxation imposed by different State oregon governmental subdivision thereof (whether oregon not astatine the aforesaid complaint oregon connected the aforesaid basis), without a recognition (for example, a resale exemption certificate) for taxes paid successful different jurisdictions.”
14 The word “discriminatory tax” is defined as:
(A) immoderate taxation imposed by a authorities oregon governmental subdivision thereof connected physics commerce that:
(i) is not mostly imposed and legally collectible by specified authorities oregon specified governmental subdivision connected transactions involving akin property, goods, services oregon accusation accomplished done different means;
(ii) is not mostly imposed and legally collectible astatine the aforesaid complaint by specified authorities oregon specified governmental subdivision connected transactions involving akin property, goods, services oregon accusation accomplished done different means, unless the complaint is little arsenic portion of a phaseout of the taxation implicit not much than a five-year period;
(iii) imposes an work to cod oregon wage the taxation connected a antithetic idiosyncratic oregon entity than successful the lawsuit of transactions involving akin property, goods, services oregon accusation accomplished done different means;
(iv) establishes a classification of net entree work providers oregon online work providers for purposes of establishing a higher taxation complaint to beryllium imposed connected specified providers than the taxation complaint mostly applied to providers of akin accusation services delivered done different means;
(B) immoderate taxation imposed by a authorities oregon governmental subdivision thereof, if:
(i) the sole quality to entree a tract connected a distant seller’s out-of-state machine server is considered a origin successful determining a distant seller’s taxation postulation obligation; or
(ii) a supplier of net entree work oregon online services is deemed to beryllium the cause of a distant seller for determining taxation postulation obligations solely arsenic a effect of:
(I) the show of a distant seller’s accusation oregon contented connected the out-of-state machine server of a supplier of net entree work oregon online services; or
(II) the processing of orders done the out-of-state machine server of a supplier of net entree work oregon online services.
15 The word “electronic commerce” is defined arsenic “any transaction conducted implicit the Internet oregon done Internet access, comprising the sale, lease, license, offer, oregon transportation of property, goods, services, oregon information, whether oregon not for consideration, and includes the proviso of Internet access.”
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