Will Maryland’s digital ad tax hold up in court?

Overriding a veto by Governor Larry Hogan late last week, the Maryland Legislature promulgated a bill that would allow the state to be the first to collect taxes on digital advertising. Although this decision could make the history books, experts said Government technology that legal challenges are likely underway and that other states will be watching the fireworks as they consider their position on the matter.

The legislation, which has been strongly backed by Senate Speaker Bill Ferguson, targets companies that raise more than $100 million through digital ads. As such, the law would impact big tech players like Facebook and Google, both of which made billions of dollars in revenue from digital ads last year, according to CNN.

In one Facebook postFerguson said it’s time for big tech to pay up in Maryland, “just like our small businesses.”

“At a time when Maryland’s budget is impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and businesses can foot the bill, or big tech can start paying their fair share,” said Ferguson.

Opposition to Bill included not just Hogan, but many business groups. The fear is that small businesses and consumers will end up paying more themselves, perhaps due to big tech’s legal maneuverings.

Lucy Dadayan, senior research associate for Urban-Brookings Tax Policy Center, said local and state governments “should consider adjusting their tax structures” to accommodate a new era in which e-commerce is an economic force. dominant. In his view, Maryland has taken a step in the right direction. At the same time, she advises states not to rush their tax proposals because companies will look for loopholes to avoid taxes and shift the burden to others.

“Enacting digital taxation will not be an easy task,” Dadayan wrote in an email. “Of course, there will be many challenges ahead of legislatures… For example, legislatures and policymakers should carefully craft policies that take into account different tax rates and tax policies for cross-border jurisdictions.”

Dadayan believes that companies that participate in the digital economy should be taxed like companies that participate in the non-digital economy. Otherwise, states could lose crucial revenue as the global economy evolves.

To illustrate the importance of digital taxation, Dadayan pointed to the Supreme Court’s decision in South Dakota v. Wayfair Inc. which gave states the ability to collect taxes on remote online sales. The tax revenue from those sales “helped tremendously” during last year’s pandemic.

“If the Wayfair decision had not taken place [more than] two years ago we would be in such a dire situation today with the pandemic and the associated fiscal challenges,” Dadayan said.

Verenda Smith, deputy director of the Federation of Tax Administrators, wrote in an email that she expects it will be years before many states pass laws that would impose taxes on digital advertisements. She cited the example of New York introducing the idea behind the Market Vendor Collection Laws. It took a few years before other states passed similar legislation.

“[T]there is no suggestion that digital advertising will be any different,” Smith said. “Other countries have been engaged in a vigorous debate for some years about how best to apply the tax fairly and equitably in a digital environment. But most state officials want to see how something works in another state before seriously considering it. They want to know how a policy will affect multiple taxpayers, multiple types of industries. They want to be aware of the political landmines and have an idea of ​​the profit and loss of revenue”.

Dadayan also mentioned that other countries are considering taxing digital ads. She said taxing digital ads was not as controversial at this point in Europe and that US policymakers should look at best practices in other countries while recognizing the US Constitution.

According to Baltimore Business Journal, Maryland Attorney General Brian Frosh’s office said a court could find “certain provisions” of the state’s new law are unconstitutional. However, Frosh’s office added that such provisions are not “clearly” unconstitutional in its view.

In an email to Government technologyNancy Prosser, general counsel for the Multistate Tax Commission, said she could not yet comment on the legality of Maryland’s bill, but her understanding is that “taxpayers will take legal action and at least the one of the challenges to the new law will likely be under the Internet Tax Freedom Act [ITFA].”

The ITFA was adopted in 1998 under the Clinton administration. the law prohibits “taxes on Internet access” and “multiple or discriminatory taxes on electronic commerce”. Prosser thinks the constitutionality of the ITFA could come up as the debate continues over digital advertising taxes.

“To the extent there is a challenge under the ITFA on the ground that the [Maryland] imposes a tax on digital advertising but not on print advertising or other types of advertising, this could provide states with an opportunity to determine whether the ITFA itself is constitutional,” Prosser wrote. “Until now, this has been an academic argument. The 2018 Supreme Court decision in Murphy v. National Collegiate Athletic Association, which involved the application of the Court’s anti-requisition rule to a federal law regarding sports betting in New Jersey, may be part of an ITFA challenge.