Man fishing in ocean with title about Maryland ad tax

Maryland’s digital advertising tax is nuanced and evolving, which means its impact on taxpayers is evolving as well. This tax is startling in its vagueness, resulting in controversy filled feedback to the state.

By Alexander Korzhen and Stacey Roberts

Maryland’s digital advertising gross revenues tax was originally set to become effective mid-year 2020 but Maryland was not ready. So, the effective date has been pushed back to January 2022. The legislature in Maryland has pushed a lot onto the comptroller’s office to create forms, regulations and define sourcing, all of which takes time.

Digital advertising services are broadly defined as any advertising services delivered on any type of website or application that a person can access on a device. The intent of the tax is to go after Google and Facebook and other large online social media platforms.

When initially issued as a gross revenues tax, one question was whether vendors are able to pass it through to taxpayers similar to a sales tax? With the follow up bill a part of the veto override earlier this year, we now know that vendors cannot pass the tax through like sales tax. This is a tax on the entity.

Tax pyramiding

Another major concern is tax pyramiding. If it is not clear what stage of the transaction the tax applies or if the tax applies in multiple stages, a taxpayer could conceivably run into a tax-on-tax situation.

The tax rates start at 2.5% and phase up to a 10% rate. However, the gross revenues tax only applies to companies who have global revenues above one hundred million dollars. At one hundred million dollars in revenue, the company would pay at a 2% tax rate. This rate increases as revenue increases.

The law also includes a filing requirement if a company has Maryland’s sourced gross revenues above one million dollars. How sourcing is determined is unclear. There could be a census approach or a follow up bill that prevents pass-through.

Although the law excludes broadcasters and certain news outlets, the breadth of the definition could potentially capture companies not otherwise intended for the tax. There will be taxpayers that could get caught up in the law and may not necessarily know.

The Maryland gross revenues tax has been heavily discussed in the tax practitioner community. Lawsuits have been filed at both the state and federal levels. There are questions whether this type of gross revenues tax violated the Internet Tax Freedom Act and the Commerce Clause, creating strong arguments against the law’s constitutionality.

Global implications

The Organisation for Economic Co-operation and Development (OECD) continues to work on its pillar project, looking to standardize tax treatment from an international perspective. A lot of countries are looking to this project to define how digital services at the corporate level will be taxes internationally.

This happens because at the international scale, nexus is defined by permanent establishment, which is not the sole standard for nexus in the United States anymore.

Other states have proposed similar legislation and are waiting in the wings to see how Maryland fares. We’ll keep you posted on the latest. Subscribe to Tax News. 

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