The unintended consequences of this misguided legislation could be far worse than the purported revenue gains being touted by the bill’s supporters. The bill most certainly would hurt Maryland small businesses and consumers at a time when they are already grappling with the economic downturn created by the coronavirus pandemic. Additionally, lawmakers will be scrambling to find other revenue sources — likely other tax and fee increases — to cover the legal costs that are bound to be incurred when this bill is challenged in the courts.
In its last session, the Maryland legislature passed legislation to create a digital advertising gross receipts tax that would be imposed on a company’s annual gross revenue in the state. Successful companies that already generate sales, corporate and individual income taxes would be taxed again — not on their net profits, but their gross receipts. The bill would establish a graduated tax on companies with more than $100 million in global digital advertising revenue and at least $1 million in advertising revenue in Maryland. The tax — between 2.5 and 10 percent depending on a company’s total global revenue — would define digital advertising to include banner ads, search engine ads and other ads posted on a website, on an application or within a piece of software.
Proponents of this digital ad-tax scheme believe they are targeting large out-of-state tech companies, which they view as easy pickings to generate new revenue. In actuality, the burden of this tax would fall on small businesses and, ultimately, Maryland consumers. To cover the cost of the tax increase, advertisers would merely raise prices. This would mean many businesses would choose to discontinue advertising and risk losing new customers. If, instead, they pay the higher costs, employers could be forced to recoup the expense by cutting staff positions or limiting employee hours, benefits and wages. A 2019 Deloitte/Taj study of a similarly structured digital ad tax in France found that “approximately 55% of the total tax burden will be borne by consumers, 40% by businesses that use digital platforms, and only 5% by the large Internet companies targeted.”
If hurting the livelihoods of the small-business community is not enough of a disincentive, the risk of a trifecta of lawsuits likely to follow if this becomes law should cause lawmakers to hit the pause button. First, the bill is a clear violation of the federal Permanent Internet Tax Freedom Act (PITFA). PITFA prohibits states and localities from assessing taxes on Internet access. It also prohibits “discriminatory taxes on electronic commerce.” Maryland currently does not tax nondigital advertising, so a tax levied against digital advertising clearly disfavors digital advertising. A second legal hurdle involves a likely violation of the commerce clause. Because the tax is assessed on annual global revenue, larger global advertising providers would incur a higher tax burden than Maryland providers. Finally, the law faces a serious First Amendment challenge because it punitively treats digital commercial speech over other forms of speech.
Clearly, Maryland’s digital advertising tax is fraught with problems. Though it may seem like a simple fix, a cure-all for the state’s budget woes, Maryland lawmakers should cut their losses now and resist the temptation to impose this new form of taxation. It will not be the cash cow they envision, and it will only hurt the hard-working business owners and residents of the state in the long run.