United States

Maryland digital advertising gross receipts tax bill vetoed

INSIGHT ARTICLE  | 

On May 7, 2020, Maryland Gov. Larry Hogan vetoed House Bill 732, legislation which would have created a ‘digital advertising gross revenues tax,’ a tax on certain digital advertising revenue derived from Maryland. The Maryland General Assembly overwhelmingly approved the bill at the end of the regular session in mid-March. Governor Hogan’s veto message indicated that the bill would have raised taxes and fees on residents during a time of financial uncertainty due to the COVID-19 pandemic.

How the proposed tax would have worked

The digital advertising gross revenues tax would have been imposed on persons with global annual gross revenues of at least $100,000,000 deriving gross revenues from digital advertising in Maryland of at least $1,000,000. Tax rates varied from 2.5% to 10% depending on the taxpayer’s global annual gross revenue. The bill defined ‘digital advertising services’ as advertisement services on a digital interface, e.g., software, websites, or applications, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising and comparable advertising services. The Maryland Comptroller was to be tasked with promulgating regulations to determine the state from which revenues from digital advertising are derived.

The controversy

The digital advertising gross revenues tax was almost immediately controversial. Some criticism over the tax involved the broad definition of ‘digital advertising,’ while other criticism focused on the burden of the tax falling on smaller purchasers of digital advertising from large digital advertisers subject to the tax. Finally, many policy groups questioned whether the tax ran afoul of the Internet Tax Freedom Act, a prohibition on discriminatory taxes on electronic commerce, because the tax singled out digital advertising.

Veto override potential

The Democratic-controlled legislature passed the bill with a veto-proof margin in both chambers. The legislature can override the veto in the next legislative session, whether a special session or the next regular session. A special session was originally discussed for May but has since been postponed due to the COVID-19 crisis. At the time of publishing this article, no special session was scheduled and it was unclear whether the legislature would consider an override vote.

Takeaways

The digital advertising gross revenues tax, the first such proposal to be passed by a state legislature, is essentially a gross receipts tax for larger businesses’ spending on digital advertising in Maryland. While the tax has not yet been successful, States are likely to turn to digital taxes to cover mounting shortfalls due to reduced tax collections because of the pandemic. For example, a proposed bill in Nebraska would impose the sales tax on digital advertisements delivered over the internet that market or promote goods, services or political messages. Understanding how sales and use taxes apply to your sale or purchase of digital goods and services will be increasingly important during the COVID-19 recovery.

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