Maryland’s Digital Advertising Tax: The First of Its Kind
In 2021, Maryland became the first state to enact a digital advertising tax, an unprecedented approach to regulating and taxing revenue derived from digital advertising services. The bill intended to increase taxes for only large corporations faced scrutiny since its introduction, including an early veto by Governor Larry Hogan that was later overruled. Since then, the law has faced pushback from legislators, a pending lawsuit, and questions about both the legality and sustainability of such a complicated tax. Nonetheless, the taxable period for this law began on January 1, 2022. Following Maryland’s lead, numerous other states are working to pass similar legislation.
“With our state in the midst of a global pandemic and economic crash, and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now.”
A New Age of Taxation
In February 2021, the first introduction of the House Bill outlined the revolutionary digital advertising tax as a tax on “advertisement services on a digital interface”, including banner advertising, search engine advertising, interstitial advertising and more. The tax is imposed on taxpayers with an annual global revenue of at least $100 million and is based on an increasing tax rate ranging from 2.5% to 10%. Two months after the bill came into effect, legislation was passed that substantially amended three : delaying the applicable tax year from January 1, 2021, to January 1, 2022, excluding the operations of broadcast and news media entities from being taxed, and prohibiting taxpayers from “directly passing” any associated costs of the tax to customers. The changes came following suspicions that the tax would not specifically target large corporations as originally intended.
Despite the amendments made to the Senate Bill, the final enacted law left many unresolved concerns regarding how the tax would be reported and calculated. provides an apportionment formula to be used in calculating expected digital advertising revenue. The result is meant to represent taxable activity only in Maryland, but the formula will likely tax out of state activity. If other states were to implement the same formula, it’s probable that double taxation would occur.
The apportionment formula also relies heavily on locating the devices used to report access to digital advertising. Because of this, taxpayers use Internet Protocol (IP) addresses or cookies to determine if the device is in or outside of Maryland. Although Virtual Private Networks (VPNs) and private browsers exist, the exercise of determining precisely where the advertisements are accessed is nearly impossible. Although the law provides a throw out rule to exclude from the tax calculation any devices that cannot be located, this method also does not accurately capture the digital activity in Maryland.
Pending litigation
Although issues with logistics of the bill were quickly identified, the larger issue became the bill’s legality. Within one week of the veto override, the U.S Chamber of Commerce and four major technology trade associations filed a complaint in federal district court against the state of Maryland. The pending lawsuit alleges that the tax violates the Federal Internet Tax Freedom Act by allowing double taxation. The tax is also said to violate the U.S. Constitution Commerce Clause by regulating activity outside of the state and the Due Process Clause of the Fourteenth Amendment by including out-of-state activity in the tax liability calculation to Maryland.
Notwithstanding pending lawsuits, several states have moved forward with their own variations of a digital advertising tax. Texas, West Virginia, Massachusetts, New York and Florida are among states that have already introduced legislation similar to Maryland’s tax. With each state that adopts a digital advertising tax, the probability of double taxation and other legal issues increases. Whether Maryland’s groundbreaking digital advertising tax will prove viable is uncertain, but it is certain that more states will follow.