Maryland has become the first state in the country to pass legislation that will impose a tax on revenue from online ads. The bill, titled Taxation – Tobacco Tax, Sales and Use Tax, and Digital Advertising Gross Revenues Tax (the "Ad Tax"), originally passed by the Maryland General Assembly on March 18, 2020, was vetoed by Governor Larry Hogan on May 7, 2020. The veto was overridden by the Maryland House of Delegates on February 11, 2021, and then by the Maryland Senate on February 12, 2021. The Ad Tax was initially vetoed by Governor Hogan because, he explained at the time, it would "raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling." It is estimated that money from the Ad Tax, earmarked for education reform, will generate $250 million per year for the State. However, critics of the Ad Tax have challenged the constitutionality of the bill, arguing that the Ad Tax conflicts with federal law, including the Internet Tax Freedom Act ("ITFA"), the Commerce Clause and the First Amendment. It could be years before Ad Tax-related litigation comes to an end.

Who is impacted by the Ad Tax?

Ad Tax Specifics

The Ad Tax imposes a levy on annual global gross revenues. Businesses with global annual gross revenues of: 1) $100,000,000 to $1,000,000,000 will be taxed at 2.5%; 2) $1,000,000,001 to $5,000,000,000 will be taxed at 5%; 3) $5,000,000,001 to $15,000,000,000 will be taxed at 7.5%; and 4) above $15,000,000,000 will be taxed at 10%. Businesses that have annual gross revenues from digital advertising services in the State of Maryland that exceed $1 million will be required to file a tax return with the Maryland Comptroller. Businesses that are required to file digital advertising tax returns, but willfully fail to do so, will be guilty of a misdemeanor and subject to fines not to exceed $5,000, imprisonment (of corporate executive(s)) not to exceed five (5) years, or both.

States to Follow in Maryland's Footsteps?

Although Maryland is the first state to pass legislation, other states, including Connecticut and Indiana, have introduced similar digital ad tax legislation. In Europe, countries, such as France and the United Kingdom, have also passed ad tax measures that apply to certain technology companies. Large companies, such as Facebook and Google, generate billions of dollars in digital advertising revenue each year. It is only natural for jurisdictions with struggling economies to pass legislation to tax these revenues in an effort to improve their financial condition. Although there will be significant pushback from the tech giants, it remains to be seen whether the Ad Tax withstands constitutional challenge and if/how other states may follow Maryland's lead.

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