Targeting Big Tech, Maryland becomes first state to tax digital advertising

Maryland became the first state in the country on Friday to impose a tax on digital advertising, as the state’s senate voted to override a gubernatorial veto of legislation that would impose up to a 10% levy on revenue from online ads shown in Maryland.

The enactment of the bill, by a 29-17 vote, marks the beginning of what could become a wave of similar legislation across the country, as policymakers increasingly target the economic dominance of large tech platforms, some of which have built massive financial engines through advertising technology.

It’s also another example of how proposals being introduced abroad to rein in Big Tech are increasingly gaining traction in the United States. But it could spark a court battle over the legality of the tax and its impact on digital businesses.

The digital advertising provisions of Maryland’s new tax law could raise an estimated $250 million in its first year, with revenues being earmarked for education. One of the policy’s chief proponents, Senate President Bill Ferguson (D), is a former teacher for Teach for America.

In a Facebook post Friday morning, Ferguson said the bill is targeted at companies that make more than $100 million a year selling digital advertising, a threshold that large technology companies like Facebook and Google would easily surpass. Facebook and Google generated $84 billion and $147 billion in digital advertising revenue last year, respectively.

“This targeted tax on companies that make over $100,000,000 a year ONLY from digital advertising is a vital mechanism to make sure big tech pays taxes in Maryland, just like our small businesses,” Ferguson wrote. “At a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to Covid-19, Maryland families and businesses can foot the bill, or big tech can start paying their fair share.”

Gov. Larry Hogan (R) has opposed the tax bill. He vetoed it last year, saying it would “raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling. 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.”

Business and technology groups have also opposed the bill. After the Maryland House of Delegates voted to override Hogan’s veto earlier this week, the Internet Association — a trade group representing Amazon, Facebook, Google and others — said in a statement it would harm small businesses for whom digital advertising “is a critical lifeline” to attract new customers.

Maryland may soon be the vanguard for a wave of state taxes on digital platforms. States including Connecticut and Indiana have introduced similar legislation.

The growing push among states to tax tech giants also follows a push by foreign governments, including France, the UK and others, to impose new taxes on tech companies. The Trump administration had opposed those efforts, getting into a public spat with France over the issue last year.

The Maryland tax could face roadblocks, however. State Senator Stephen Hershey, speaking ahead of the vote, predicted “years of litigation” ahead for the law. Critics said the bill raises questions about the state’s power to tax digital commerce and whether it may conflict with federal law and the interstate commerce clause of the Constitution.

Last year, Maryland Attorney General Brian Frosh determined that “there is some risk” of a court overturning the law but that he believed the bill is “not clearly unconstitutional.”

State Senator Jim Rosapepe (D), arguing for the digital ad tax, acknowledged that litigation is likely but said he had high confidence that the judicial system would resolve the questions appropriately. The bigger issue, he said, is how tech companies are “dodging taxes all over the world.”

“We can make sure that if Big Tech doesn’t pay its fair share in West Virginia, or doesn’t pay its fair share in India, at least Big Tech will pay its fair share in Maryland,” Rosapepe said.