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A Toxic Tax

February 9, 2021

Last May, Maryland Governor Hogan vetoed HB 732 (The Digital Advertising Gross Revenue Tax) which would have imposed a levy of up to 10 percent on digital advertising in the state. Governor Hogan’s veto message correctly stated that this misguided bill “would raise taxes and fees on Marylanders at a time they are out of work and struggling.” The governor’s message emphasized that “it would be unconscionable to raise taxes and fees now!”

Unfortunately, while Marylanders continue to face very severe health threats from the pandemic and major economic challenges, Maryland’s legislative leadership is signaling an attempt to overturn the governor’s veto in the near future. If successful, this tax on digital advertising would be the first in the nation, imposed when consumers and businesses are more dependent on the digital marketplace than ever before. It would create a highly negative commercial environment in Maryland and hit consumers hard due to the added marketing and other costs that inevitably would be generated that almost certainly will be passed on to the general public.

Already, some legislators in Maryland have recognized this problem and have drafted legislation in an attempt to bar technology companies from passing on this tax to small businesses. There is significant doubt as to whether this proposal would succeed in its goal, and it does nothing to deal with the manifold other defects with this bill.

If HB 732 is upheld by the Maryland legislature, the new law will face severe challenges in the courts. The federal Internet Tax Freedom Act bars discriminatory internet-only taxes on electronic commerce, and the Maryland digital advertising tax is exactly the kind of proposal the Internet Tax Freedom Act bans. HB 732 also raises serious First Amendment and due process issues. 

One other important aspect of this proposal is extremely pernicious and has not received the attention it deserves. The bill determines the percentage level of the digital ad tax not on how much digital activity takes place solely in Maryland, but rather on a company’s gross revenues from all of its digital activity, regardless of location. One can already anticipate the howls of protest from the Maryland legislature if Virginia, for example, were to impose a higher digital ad tax on Maryland companies due to their digital activities outside Virginia even if their activity in that state is equal to or less than their Virginia competitors! This, of course, is exactly what HB 732 would impose on all other state and international advertisers. This aspect of the proposal would clearly violate the dormant Commerce Clause of the Constitution.

Therefore, rather than generating more revenue for the state, HB 732 would only assure that Maryland and the business community will be forced to expend large amounts litigating this misguided proposal. In addition, advertising taxes slow job growth (especially for small businesses, which are struggling so much during the pandemic), dampen consumer demand, discourage business investment, and ultimately cause consumers to pay more for products and services.

Assuredly, this bill would create a highly toxic marketplace for digital advertising. We therefore strongly urge the Maryland legislature not to overturn Governor Hogan’s veto of HB732.

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