As states plan to attempt lost revenues and overcome budget shortfalls caused by the COVID-19 pandemic, they are contemplating new and unique approaches to taxation. However, if these decisions are made in haste, it can result in uncertainty and unintended consequences.
The latest example is Maryland, which recently passed a digital advertising services tax. The new law imposes a tax on banner advertising, search engine advertising, interstitial advertising and other comparable services that are delivered on software, websites or applications. The tax will be imposed only on companies with:
- At least $1 million in Maryland-sourced digital advertising, and
- $100 million in global annual revenues.
Unanswered Questions Remain
In its current form, the law leaves several questions unanswered, such as the applicability of the tax to alternative forms of digital media, which are becoming more popular as consumers turn to ad-blockers and commercial-free streaming. This includes product placements and embedded advertising in movies and television programs, which are not explicitly covered under the law’s definition of digital advertising.
The law may face legal hurdles as well, including the Permanent Internet Tax Freedom Act, which prohibits states from imposing discriminatory taxes on electronic commerce and not on traditional advertising. Basing the taxation solely on a monetary threshold could also violate the Equal Protection Clause.
While Maryland’s goal was undoubtedly to target the companies with the largest internet presence, it casts a much wider net than the legislature may have intended. If your business advertises in Maryland and meets the financial threshold, you will need to factor this additional obligation into your tax planning, even if legal challenges are raised.