The U.S. Chamber of Commerce and industry groups backed by Google, Facebook, and Amazon filed a lawsuit on Thursday against the Maryland comptroller in an attempt to block the state’s new digital ad tax.
The measure will impose a 2.5% tax on ad revenues from companies that make between $100 million and $1 billion. Companies that make more than $15 billion, such as Google and Facebook, will pay a 10% tax on ads that are displayed inside the state.
The lawsuit, filed in federal court, argues that the tax, which would be the first in the country, is unconstitutional and violates existing federal laws — in addition to being a “deeply flawed” punitive measure against companies that are “too big to trust.”
“Maryland lawmakers disapprove of large digital advertising companies and intended to penalize them,” the suit reads. It argues that the tax “will have the opposite of the Act’s intended effect, reducing resources to support the creation and availability of high-quality ad-supported content, leaving the online filed overrun by low-quality ‘junk’ content.”
Caroline Harris, vice president of tax policy at the Chamber of Commerce, told the Washington Examiner that the tax was “ill-timed” given the coronavirus pandemic and cautioned that small businesses relied on advertising through platforms like Google to raise awareness.
“In light of the current pandemic and economic uncertainty, increasing taxes on services used by small businesses to keep themselves running is a particularly poor and ill-timed policy,” Harris said. “This law represents tax policy at its worst — it risks double taxation and brings uncertainty to an already suffering economy. We welcome the opportunity to successfully litigate this issue and protect pro-business interests not only in Maryland, but nationwide.”
Lawmakers intend to use the revenues raised by the new tax to fund the state’s ambitious Kirwan Commission school reforms.
The suit is backed by the Internet Association, NetChoice, and the Computer & Communications Industry Association. The three Washington, D.C.-based firms have dozens of Big Tech companies among their members, including Google, Facebook, and Amazon — three companies likely to pay the greatest amount from the digital ad tax.
Last year, more than half of all advertising revenue went to digital advertising companies for the first time, and Facebook, Google, and Amazon alone represent more than two-thirds of the entire $110 billion online advertising market.
Maryland Gov. Larry Hogan vetoed the tax earlier this month, citing the harm raising taxes could do to an economy struggling to recover from the coronavirus pandemic. Both the state General Assembly and Senate overruled the governor’s veto last week.
Other states are considering similar initiatives. Digital ad tax proposals have already been introduced in Connecticut and Indiana, and other states attempted to pass similar legislation in 2020 but were unsuccessful.
McDermott Will & Emery, the firm representing the Chamber of Commerce and the lobbying groups, said that the lawsuit should be seen as a warning to those states.
“The filing of this suit sends a signal to other states, like New York, Connecticut and Montana, where similar proposals are under consideration,” the firm said in a statement. “Policymakers in those other states should recognize that following Maryland’s lead will only lead to the courthouse.”
