Executive summary: Maryland explains tax compliance as litigation remains pending
The Maryland Comptroller recently issued a Tax Alert on complying with the digital advertising tax by explaining due dates of the 2022 tax return (the first ever return for the tax) and clarifying estimated payments. RSM recently wrote about the current status of the tax, but impacted taxpayers should take special note of the state’s compliance alert, even though litigation continues at the state supreme court.
Comptroller’s tax alert
Pursuant to the alert, the comptroller has published Form 600, Digital Advertising Gross Revenues Tax Return, a downloadable spreadsheet with instructions to complete the return. This is the first annual return due for the digital advertising tax that, after a brief delay, became effective Jan. 1, 2022. The form is due April 17, 2023. There are no applicable extension provisions, i.e., the six-month income tax filing extension does not apply to the digital advertising tax. Form 600 must also be filed if taxpayers are claiming a refund of the tax.
The alert further explains that interest accrues on unpaid tax from the date the tax is due. Generally, estimated payments of at least 110% of the prior year tax or 90% of the current year tax qualify for a safe harbor. Because this is the first year of the tax, all taxpayers will qualify for the safe harbor and underpayment penalties will not be imposed on 2022 filings. Finally, the form for 2023 estimated taxes is also available.
Impacted taxpayers should note that while the tax was declared unconstitutional through a declaratory judgment, the manner of the judgment and the lack of written opinion has caused some confusion among taxpayers office. A stay of the judgment has not been issued. Accordingly, while the judgment does not require the state to take any action one way or the other, the comptroller has taken action to continue enforcement of the tax as detailed in its alert. That action should not come as a surprise considering that the arguments are scheduled at the state supreme court on May 5, 2023, after the first tax return is scheduled due on April 17, 2023. If the supreme court were to overrule the circuit court or send the case back for further proceedings, the state would likely prefer to have the compliance and tax collection processes in place.
Taxpayers are in another position. Taxpayers subject to the tax must determine whether to comply with the estimated payments and filings during the pendency of the litigation in the context of the circuit court finding the tax unconstitutional. Presumably, taxpayers can use the declaratory judgment as a defense against an assessment or penalty from the state for failing to file or pay, however, that may not be an ideal contingency during pending litigation. Accordingly, taxpayers should carefully consider whether to forgo any estimated payments or filings. For more information on the current status of the tax and brief history, please read our recent alert on the digital advertising tax.