On Feb. 11, 2021, the Maryland Legislature overrode Gov. Larry Hogan’s veto and enacted the first digital service tax in the United States to raise education revenue. A legal battle will decide if states have the authority to tax companies headquartered in another.
The bill in question is House Bill 732: Taxation — Tobacco Tax, Sales and Use Tax, and Digital Advertising Gross Revenues Tax. The bill takes its design from a European proposal to impose a 3% digital services tax on revenue derived from digital advertising. The European bill itself failed to get approval. Still, tax experts view it as the starting point that other European Union members would turn to for their proposed attempts to impose a digital services tax. It is easy to see the allure. Over $325 billion were spent on digital advertising in 2019, and this is estimated to increase exponentially.
The bill’s main organizer is Democratic state Sen. Bill Ferguson. He told the New York Times, “This idea that one outsider can exploit and use the personal data of another area and pay nothing for its use, that doesn’t work in the long run.”
While Maryland is the first to pass a digital services tax, several other states have introduced their own versions for consideration. West Virginia and New York were unable to pass the bills in the past. However, tax experts expect them to make a second attempt in light of Maryland’s victory.
The tax is limited to companies that make at least $100 million a year. A 2.5% tax applies to those that make between $100 million and $1 billion, while companies that make more than $15 billion will pay 10%. With the new tax in place, Maryland expects to make over $250 million in tax revenue, which would help cover the state’s declining tax income and fund schools statewide.
The state has had a mixed history with similar schemes. In 2012, Gov. Martin O’Malley stated that the expansion of casino gambling would provide “hundreds of millions of dollars for our schools.” However, any money collected from the funding only replaced general revenues instead of adding to them.
A coalition of internet organizations has already come forward in partnership with plans to sue Maryland over the law. It currently includes the Internet Association, NetChoice, and the Computer and Communications Industry Association. The coalition’s lawsuit argues that it is not a tax but a “punitive fee, penalty, or fine” that would end up affecting company conduct outside of Maryland’s borders. The lawsuit also claims that a digital services tax breaches the Internet Tax Freedom Act, which prevents states from taxing internet access. The act became law in 1998 as a temporary moratorium, only to be permanently extended in 2016 by former President Barack Obama.
Heather Greenfield, CCIA’s director of communications, informed the Washington Examiner that the CCIA views the tax as a problem because it “narrowly targets tech companies, making it discriminatory.” CCIA President Matt Schruers said in a statement, “The Maryland state tax aimed narrowly at a few companies’ but broadly taxing global revenues is concerning both in scope and precedent. The Maryland legislation suffers from numerous constitutional infirmities, and we expect it to be blocked on legal grounds.”
Steve DelBianco, president of NetChoice, concurred with this assessment. He told the Washington Examiner, “This law is like a toll booth that collects only from new cars and no one else, so any state following Maryland’s awful example will have to refund all those tolls when a court rules that it’s illegal discrimination.”
