State lawmakers override veto, become first in nation to tax online ads
February 12, 2021
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None of these companies are keen to hand over a slice of their revenue to Maryland.
Enlarge / None of these companies are keen to hand over a slice of their revenue to Maryland.

Maryland today became the first state in the nation to impose a tax on digital advertising revenue, overriding an earlier veto from the governor and incurring the wrath of piles of Big Tech businesses that are all but guaranteed to sue.

The bill (PDF) levies a state tax of up to 10 percent on the annual gross revenues of all digital advertising aimed at users inside Maryland state. Proceeds from the new tax are explicitly earmarked to go into an education fund dedicated to improving Maryland public schools.

“Right now, they don’t contribute,” the bill’s primary sponsor, Sen. Bill Ferguson (D) said of the bill. “These platforms that have grown fast, and so enormously, should also have to contribute to the civic infrastructure that helped them become so successful.”

Both chambers in the state’s General Assembly, its Senate and its House of Delegates, approved the bill by wide majorities last year. Maryland Gov. Larry Hogan vetoed the bill in May, but it had sufficiently high support in both chambers of the legislature to pass a veto override, and both houses approved the veto override this week.

What will the new law do?

The Digital Advertising Gross Revenues Tax does exactly what it sounds like: It taxes revenues generated from online advertising. Digital advertising services, as defined in the bill, include basically every kind of Web or app display ad you can think of, including “advertisements in the form of banner advertising, search advertising, interstitial advertising, and other comparable advertising services.”

The bill calls for using a simple fraction to determine how much tax an operator owes to Maryland: revenues derived from digital advertising services in Maryland over revenues derived from digital advertising services inside the United States.

As an example, let’s say that a company managed to display the same ad to all 330 million US residents at the same time and made $1 from each of those impressions. (Ignore for the moment how deeply unrealistic these numbers are.) That would be $330 million total. There are about 6 million people living in Maryland, so about $6 million, or 1.8 percent, of the total revenue from that specific ad would be taxable in Maryland under the new law.

The amount of tax owed depends on the size of the business. Entities with global (not Maryland or US) annual gross revenues of under $100 million are exempted, although any business with Maryland digital advertising revenue greater than $1 million is still required to file. Businesses with global annual gross revenues higher than $100 million, up to $1 billion, owe 2.5 percent. For businesses between $1 billion and $5 billion, it’s 5 percent, then 7.5 percent for businesses with global revenue up to $15 billion, and 10 percent for anything larger than that.

The largest digital advertising firms, which include Google, Facebook, and Amazon, all fall well into that 10 percent category. Facebook, for example, generated more than $27 billion in advertising revenue in just the fourth quarter of 2020; in the whole calendar year, it generated about $84 billion in advertising revenue. Google generated at least $146.9 billion in advertising revenue in the year 2020, not including YouTube advertising. (YouTube ads generated another $19.8 billion.)

Companies will be required to self-report how much revenue they earn from ads on devices that either have Maryland-linked IP addresses or are “known or reasonably suspected” to be used in the state.

Of course businesses hate it

Tech firms large and small hate this bill exactly as much as you would guess they do, and the clock is basically ticking until someone takes legal action to try to block it.

A coalition of small and medium businesses and trade groups launched a coalition last year to lobby against the tax. The group, which bills itself as Marylanders for Tax Fairness, argues that the tax will “place an unnecessary and undue burden on the state’s entrepreneurs and job creators.”

The coalition blasted today’s veto override in a statement, saying, “This tax increase was historically shortsighted, foolish, and harmful to countless small businesses and employees, and Marylanders will remember it that way… We will continue fighting this regressive tax wherever possible, including in a court of law.”

Among the coalition members are not only several Maryland-based businesses and organizations, including several local Chambers of Commerce, but also most of the large tech-related trade groups. All of the usual suspects who represent advertising, Internet, tech, telecom, or media firms are on the list, including the Internet Association, the IAB, the NCTA, and TechNet. Those four groups represent every online firm from Amazon to Zillow and just about any brand you can name in between.

The stakes for all the firms involved may go well beyond Maryland. Other states, including high-population New York, are considering similar advertising revenue bills of their own.

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