In a victory for tech giants, America’s first and only tax targeting digital ads has been declared unconstitutional.
In 2021, Maryland introduced a digital advertising tax for companies with over $1 million of gross revenues from digital advertising services in Maryland and $100 million in annual gross revenues. But from the get-go, the law wasn’t well received.
The Tax Foundation raised a number of legal concerns with the tax, including definitional ambiguity, suspect sourcing rules, and unworkable geolocation requirements. The tailored taxation scheme that seemed to be targeting companies like Facebook, Google, and Amazon, appeared unconstitutional. Despite the resistance, it was enacted on Jan. 1, 2021, with first payments due Apr. 15, 2022.
Yesterday (Oct. 17), the Anne Arundel County Circuit Court ruled in favor of Verizon and Comcast, who filed a challenge in state court in April 2021 against Maryland Comptroller Peter Franchot. Judge Alison L. Asti noted that the digital tax:
- violates the US Constitution’s prohibition on state interference with interstate commerce.
- discriminates against certain online companies while not taxing others.
- violates the federal Internet Tax Freedom Act’s prohibition on discriminatory taxes on online services since Maryland does not similarly tax non-digital advertising.
- violates the First Amendment because it is “not viewpoint neutral.” For instance, while tech giants Facebook, Google, and Amazon, are taxed, online news sites aren’t.
The US Chamber of Commerce and groups representing online companies and advertisers are also challenging the law in the Baltimore district court.
In light of the recent ruling, the offices of Maryland’s attorney general and comptroller are both deciding next steps, which could include an appeal.
By the digits
2.5% to 10%: the sliding scale of tax levied, depending on a company’s annual gross revenue
$15 billion: minimum annual revenue for companies being charged the highest tax rate of 10%
$250 million: money the digital tax law would raise to spend on K-12 education measures, including raising teacher salaries and help struggling schools
The future of digital ad taxes
Maryland may be the only state to have introduced a digital ad revenue tax—but it’s not the only state to have ever weighed one. Bills along the same lines have been introduced in more than a dozen states including, Connecticut, Massachusetts, New York, and Texas.
After Maryland’s defeat, the legal and constitutional cases become tougher. Then, critics also have a business case to fight it: The bulk of the tax will be passed on to small businesses and consumers. That’s what happened under a similar French digital advertising tax proposal, where just 5% of the tax was borne by Big Tech.
Although, supporters of the law may argue that there is no hard-and-fast rule. In the UK, Google passed on the burden to advertisers, but Facebook did not.
“State legislators should also be wary of allowing the sentiments of the moment to cloud their judgment on good policymaking. The increased momentum surrounding digital taxation has coincided with a wave of conservative anger about social media censorship—but however conservatives feel about their treatment on social media, it should not have any bearing on how they view a potential digital tax.” —National Taxpayers Union Foundation
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