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Ongoing insights and analysis regarding Maryland’s proposed digital ad tax bill
With veto-proof Democratic majorities in both the Maryland House of Delegates and the Senate, Governor Hogan’s vetoes were predicted to be overridden. However, veto override attempts may have to wait until the legislature reconvenes next year. The legislature adjourned sine die on March 18 and no special session is planned for the remainder of 2020, according to statements made on Sept. 16 by Senate President Bill Ferguson and House of Delegates Speaker Adrienne Jones.
Vetoes are generally handled during the first few days of a legislative session, giving taxpayers little time to convince lawmakers that the tax proposals will needlessly embroil the state in costly litigation and fail to produce the anticipated revenue. An additional wrinkle for these veto overrides was highlighted in an August memorandum by the state Attorney General’s Office which advised lawmakers that they faced legal risks if they override a gubernatorial veto while meeting online or outside the City of Annapolis. The General Assembly has yet to finalize its pandemic safety protocols for the upcoming session and the votes to override Governor Hogan’s vetoes could dwindle as lawmakers hear taxpayer objections to the legislation and weigh the costs of the inevitable legal battle.
The General Assembly had the numbers to override the bills this year, but continued support for an override is not certain.
State officials have informally acknowledged that these bills will be subject to an immediate legal challenge, meaning that there will be no additional revenue to offset the anticipated legal costs. Eversheds Sutherland is working with a number of companies to develop a litigation plan.
H.B. 732 proposes 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.”
Determining whether digital advertising taxes are “in Maryland” is problematic. The introduced version of the digital advertising tax proposed to source (and tax) digital advertising services to Maryland based on either:
However, the final version of the tax strikes these provisions. The legislation directs the Comptroller to adopt regulations that will entirely determine how to source digital advertising service revenues to the state.
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.
Given the current economic climate, lawmakers may return to Annapolis with a change of heart in January, as the burdens of these taxes are likely to fall ultimately on Maryland’s small businesses and consumers who are already being hit hard by the struggling economy. However, the desire of lawmakers to target companies that sell digital advertising may overshadow concerns about who will ultimately bear the tax burden.
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.
In this podcast from March, Eversheds Sutherland’s SALT Team provides a ten minute update on everything you need to know about this first-of-a-kind state tax, including its applicability and the legal challenges that are expected if it becomes law.
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 (PDF).