Maryland’s 2021 digital advertising tax — the first of its kind in the U.S. — was poised to raise an estimated $250 million annually by taxing corporations like Google and Facebook for selling online ads. However, the tax would apply to corporations of all sizes, with the rate of tax increasing as a company’s revenue increases. The far-reaching implications of this tax stood to not only change the state’s tax code but also to serve as a precedent for other states.

In at least a temporary reprieve, the Maryland Circuit Court recently struck down the tax on digital advertising. But, as most states continue their aggressive search for new revenue streams, Maryland isn’t the only state trying out this new taxing trend — and the future impact on businesses could be significant.

Maryland’s Digital Advertising Tax Decision

Judge Alison Asti of the Maryland Circuit Court of Anne Arundel County granted summary judgment from the bench in favor of the Telecom companies regarding its challenge to the state’s digital advertising tax. The Court ruled: 

1. The proposed tax discriminated against e-commerce, which in turn violated the Internet Tax Freedom Act (ITFA) in that nondigital advertising is not taxed in a similar fashion. 
2. The proposed tax violated the Dormant Commerce Clause, since there is little to no effort to apportion the tax based on in-state activity. In addition, the proposed tax was calculated at a tax rate based on gross revenue, and states are clearly prohibited from passing legislation that discriminates against interstate commerce. 
3. The exclusion of certain industries from the tax violated the First Amendment. 

The Maryland Attorney General is currently reviewing the decision and is expected to appeal the order to the Maryland Court of Special Appeals. In addition, the U.S. Chamber of Commerce, along with individual companies, are challenging the law in federal court with oral arguments set to be heard in November.

Additional States Pursuing a Digital Advertising Tax 

While the court decision is a win for businesses in Maryland who rely heavily on digital advertising, it’s likely not the end of the story. In addition to Maryland appealing this particular case, states such as New York, Connecticut, Indiana, Massachusetts, Texas and Washington have considered similar digital advertising tax legislation. 

If your business sells digital ads on its website, it will be important to add this to your state and local tax checklist for all of the states in which you do business, so you can plan appropriately.

Contact Nick Longo at nlongo@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.