Reed Smith In-depth

Following the vote by the Maryland Senate to override a gubernatorial veto on Friday, February 12, 2021, Maryland became the first state to enact a tax on digital advertising services. Amendments to the new law are now being considered by both chambers of Maryland’s General Assembly. Below, we take an in-depth look at Maryland’s newest tax, highlight the immediate and potential residual effects of Maryland General Assembly’s veto override and the potential changes, and provide a forecast on whether the tax will survive the expected judicial challenges.

Autores: DeAndré R. Morrow Jeremy Abrams John P. Feldman

Review of Maryland’s Digital Advertising Gross Revenues Tax

Digital Advertising Services

Until two days before the early end of the 2020 legislative session, House Bill 732 (“HB 732”) focused on the taxation of cigarettes, electronic smoking devices, and other tobacco products. However, after the smoke cleared, the General Assembly rolled in a new tax – the Digital Advertising Gross Revenues Tax (“Digital Ad Tax”). The Governor vetoed HB 732 on May 8, 2020. However, on February 11, 2021, the General Assembly voted to override the Governor’s veto.

The Digital Ad Tax imposes a new tax on the annual gross revenues businesses derive from providing “digital advertising services” in Maryland.1 The legislation (currently) defines “digital advertising services” to include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising and other comparable advertising services.”2

Calculating the Digital Ad Tax

The Digital Ad Tax is imposed on a business’s “annual gross revenues,” defined as “income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles,” derived from digital advertising services in Maryland.3

An apportionment fraction is to be used to determine the annual gross revenues derived from digital advertising services in Maryland.4 The numerator would be the gross revenue of a company that comes from digital advertising in Maryland and the denominator would be the gross revenue of a company that comes from digital advertising across the U.S.5 How companies should determine the state from which revenues are derived is an open question. The law requires the Comptroller to adopt regulations to resolve this question.

Who is Subject to the Digital Advertising Gross Revenues Tax?

As currently enacted, the Digital Ad Tax potentially applies to numerous businesses, including many located outside Maryland. While the minimum assessable tax base is global annual gross revenues of at least $100 million,6 the threshold for being required to file an annual return with the Comptroller is just $1 million in annual gross revenues from digital advertising in Maryland.7 Additionally, persons who expect their annual gross revenues derived from digital advertising services in Maryland to exceed $1 million are required to file a declaration of estimated tax and pay 25% of the estimated tax on or before April 15, 2021.8 Further, declarations of estimated tax, estimated tax returns, and payments of 25% of the estimated tax will be due on or before June 15, 2021, September 15, 2021, and December 15, 2021.9

Regardless of whether the Digital Ad Tax is ultimately due, the law requires businesses that provide digital advertising services to determine whether they derive revenues from digital advertising services from within Maryland. If a business projects that its receipts derived from digital advertising services in Maryland will exceed the $1 million annual threshold, it will have a filing obligation that is quickly approaching. Based on a plain reading of the statute, a filing requirement exists even for taxpayers that do not meet the minimum assessable tax base threshold. Presumably, businesses with global gross revenues of less than $100 million will be required to file declarations stating that they do not owe tax.