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Tax Law

Maryland’s Digital Advertising Tax and Sales Tax Expansion Vetoed

Earlier today, Maryland Governor Larry Hogan vetoed H.B. 732, which proposed a first of its kind Digital Advertising Tax. The Governor also vetoed H.B. 932, which would have expanded Maryland’s sales tax to sales of digital products (both downloads and streaming).

Unless a special session is scheduled between now and the end of the year, the Maryland General Assembly will consider the Governor’s vetoes upon convening its regular session in January. As both the House of Delegates and the Senate have veto-proof Democratic majorities, lawmakers could override the Governor’s vetoes by a three-fifths vote of both chambers’ members.

Digital Advertising Gross Revenues Tax:

H.B. 732 proposed a new tax on the annual gross revenues derived from digital advertising services in Maryland. The definition of “digital advertising services” broadly includes “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”

The tax rate varies from 2.5% to 10% of the annual gross revenues derived from digital advertising services in Maryland, depending on a taxpayer’s global annual gross revenues. To be required to pay the tax, a taxpayer must have at least $100,000,000 of global annual gross revenues and at least $1,000,000 of annual gross revenues derived from digital advertising services in Maryland.

The proposed digital advertising tax has drawn scrutiny as violating federal law, including the Permanent Internet Tax Freedom Act and the dormant Commerce Clause. For Eversheds Sutherland’s critique of the tax, please see our recent article, If Md.’s Digital Ad Tax Is Passed, Court Challenges Will Follow.

Veto Letter:

Governor Hogan’s veto letter characterized the tax as “misguided” and noted that the state should not “raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling.” Because of the ongoing concerns with COVID-19, the Governor declared that “it would be unconscionable to raise taxes and fees now. To do so would further add to the very heavy burden that our citizens are already facing.”

Next Steps:

The General Assembly must consider the Governor’s veto message as the first order of business at the next regular or special legislative session, unless the rules are otherwise suspended. While legislative leaders tentatively planned for a special session at the end of May to complete the shortened legislative session, this plan has been set aside due to COVID-19 concerns. If a special session is not scheduled, lawmakers may consider an override of the Governor’s vetoes at the next regular legislative session in January.

To override the Governor’s veto, a three-fifths vote of both chambers’ members is required. As both H.B. 732 and H.B. 932 passed with three-fifths support of each chamber, a veto override is possible unless some lawmakers reconsider their support of the bill.

The vetoed tax measures were intended to fund H.B. 1300, the Blueprint for Maryland’s Future (i.e., the Kirwan education reform package). The Governor also vetoed the education reform package.

Eversheds Sutherland’s State and Local Tax team will continue to monitor Maryland’s tax developments. If Maryland’s Digital Advertising Tax is ultimately enacted, litigation based on federal law principles will quickly ensue.