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A Tangled Web

March 22, 2021

This year already has been an ominous one on the tax front for advertisers. Digital advertising taxes have proliferated. At least eight states are presently considering adopting a digital or general ad tax law. On February 11, for example, the Maryland Legislature overrode Governor Larry Hogan’s veto of House Bill 732, which imposes a tax of up to 10 percent of the assessable base for a company with global annual gross revenues exceeding $15 billion. The Act applies to taxable years after December 31, 2020 and requires taxpayers to identify such income on their Maryland tax filings. ANA and other entities worked diligently to try to defeat this bill because of its draconian effects on advertising and the general business climate in Maryland. Now, this law is facing serious legal challenges on multiple grounds. 

Because of the harmful effects of the new law, legislation was introduced in the Maryland Senate (SB 787) to amend it to exempt broadcast and news media entities from the digital advertising tax. In addition, SB 787 prohibits a person from directly passing on the cost of the digital advertising gross revenues tax to a customer through a separate fee, surcharge, or line-item. That legislation was proceeding ahead but has hit a major stumbling block. 

In the recently passed COVID-19 stimulus law, the American Rescue Plan (ARP), Congress included a $350 billion allocation to states and counties to help them pay for pandemic costs. To ensure that these funds went directly to finance these costs, the law specified that recipients could not utilize these funds to “directly or indirectly” finance tax cuts resulting from a change in law, regulation, or administrative interpretation.

The vague language in the bill has generated a great deal of uncertainty and consternation, as state officials struggle to understand whether the limitation applies to tax relief that was planned prior to the receipt of funds, how direct the connection between ARP funds and tax reductions must be, and numerous other real-world issues. The language is so unclear that at least one bill has been introduced in the U.S. Congress to fix the law, 21 state attorneys general wrote to the Treasury Department asking that it clarify many of the law’s ambiguities, and one state has initiated a court challenge.

The resulting uncertainty also has for now put screeching brakes on the Maryland legislation to provide some relief from digital advertising taxation and delay its imposition. This also creates practical immediate compliance problems for advertisers because, as they try to determine where the tax applies (or may apply), companies will be required to file declarations of estimated tax and make estimated tax payments. It’s not easy however, to calculate the assessable amount of tax, for advertisers are trying to ferret out what is meant by the “source” of digital advertising services. So far there have been no signals from the Maryland Comptroller’s office as to when regulations for the digital ad tax law will be available.

This has created a highly politically toxic situation for advertisers. Maryland and numerous other states have shown a desire to use digital ad tax policy to take a swing at the large digital platforms. But once these taxes are in place (due to the limitations in the American Rescue Plan), it will be infinitely harder to remove or modify them, even if they prove highly counterproductive to business and job creation. Therefore, the ad community needs to fight particularly hard to defeat these proposals and to challenge them as violating the Permanent Internet Tax Fairness Act (PITFA) and on constitutional grounds if they are imposed.

It is now abundantly clear that lawyers and accountants will be extremely busy in the next few months trying to help advertisers figure this out. Where these laws apply, advertisers need immediately to be keeping track of digital ad tax revenues so they can be reported and payments made, or else they will face very serious civil and criminal penalties.

Stay tuned — this mess is about to get far messier. 

comments (1)

Landon Martin

March 23, 2021 1:11pm ET

Thanks for the update Dan!

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