On February 12, 2021, the Maryland General Assembly enacted the Digital Advertising Gross Revenues Tax overriding the governor’s veto and becoming the first state to impose a tax on digital advertising. The legislation imposes a tax on the annual gross revenues derived from digital advertising services in Maryland, effective 03/14/2021 and applicable to taxable years beginning after 12/31/2020.
Controversy. The bill was originally passed by the general assembly last year in order to tax online advertising revenues of large multinational corporations such as Google, Amazon, Facebook, and others that have a large presence in digital advertising. Proponents of the tax argued that many digital companies are undertaxed or are not paying their fair share of taxes. Opponents of the tax cited potential conflicts with the federal Internet Tax Freedom Act, which prohibits discriminatory taxes on electronic commerce, and the federal Commerce Clause, which prohibits state laws that interfere with interstate commerce. On May 7, 2020, Maryland Governor Larry Hogan vetoed the bill because it would raise taxes on Marylanders at a time when many are unemployed and struggling financially due to the coronavirus (COVID-19) pandemic.
Tax. The Maryland Comptroller is required to distribute revenue from the tax to The Blueprint for Maryland’s Future Fund, which provides funding for a 10-year reform plan for early childhood, primary, and secondary education. The tax is imposed on annual gross revenues of a person derived from digital advertising services in Maryland. The tax rates are applied to an assessable base on a graduated basis. Under existing Maryland tax law, “person” means an individual, receiver, trustee, guardian, personal representative, fiduciary, or representative of any kind and any partnership, firm, association, corporation, or other entity. The legislation adds that “annual gross revenues” means income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. “Assessable base” means the annual gross revenues derived from digital advertising services in Maryland. “Digital advertising services” 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. “Digital interface” means any type of software, including a website, part of a website, or application, that a user is able to access, where a “user” is an individual or any other person who accesses a digital interface with a device.
Apportionment: The part of the annual gross revenues of a person derived from digital advertising services in Maryland is determined using an apportionment fraction: (1) the numerator of which is the annual gross revenues of a person derived from digital advertising services in Maryland; and (2) the denominator of which is the annual gross revenues of a person derived from digital advertising services in the United States. The comptroller must adopt regulations that determine the state from which revenues from digital advertising services are derived.
Tax rates: The digital advertising gross revenues tax rates are:
- 2.5% of the assessable base for a person with global annual gross revenues of $100 million through $1 billion;
- 5% of the assessable base for a person with global annual gross revenues of $1,000,000,001 through $5 billion;
- 7.5% of the assessable base for a person with global annual gross revenues of $5,000,000,001 through $15 billion; and
- 10% of the assessable base for a person with global annual gross revenues exceeding $15 billion.
Filing requirements: Each person that, in a calendar year, has annual gross revenues derived from digital advertising services in Maryland of at least $1 million must complete, under oath, and file with the comptroller a return, on or before April 15 the next year. Each person that reasonably expects the person’s annual gross revenues derived from digital advertising services in Maryland to exceed $1 million must complete, under oath, and file with the comptroller a declaration of estimated tax, on or before April 15 of that year. A person required to file a declaration of estimated tax for a taxable year must complete and file with the comptroller a quarterly estimated tax return on or before June 15, September 15, and December 15 of that year. A person required to file a return must: (1) file an attachment that states any information that the comptroller requires to determine annual gross revenues derived from digital advertising services in Maryland; and (2) maintain records of digital advertising services provided in Maryland and the basis for the calculation of the tax owed.
Payment requirements: Each person required to file a return must pay the tax with the return that covers the period for which the tax is due. However, a person required to file estimated tax returns must pay: (1) at least 25% of the estimated tax shown on the declaration or amended declaration for a taxable year with the declaration or amended declaration that covers the year, and with each quarterly return for that year; and (2) any unpaid tax for the year shown on the person’s return that covers that year with the return.
Effective date: The original 2020 Regular Session bill stated the effective date as July 1, 2020. However, the Maryland Constitution, Article II, Section 17(d) provides that the effective date of any bill enacted over the veto of the governor is 30 days after the override date or the effective date specified in the bill, whichever is later. Since the veto override of this bill was February 12, 2021, the effective date is March 14, 2021.
Proposed amendments. Exemption: L. 2021, S787 and L. 2021, H1200 are bills that have been introduced in the current legislative session that would amend the tax. The proposed amendments would exempt advertisement services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity. “Broadcast entity” would mean an entity that is primarily engaged in the business of operating a broadcast television or radio station. “News media entity” would mean an entity engaged primarily in the business of news gathering, reporting, or publishing articles or commentary about news, current events, culture, or other matters of public interest, but would not include an entity that is primarily an aggregator or republisher of third-party content.
Passing on the cost of the tax: The proposed amendments would also prohibit a person who derives gross revenues from digital advertising services in Maryland from directly passing on the cost of the tax to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.