The U.S. Chamber of Commerce and lobbying groups for tech giants have filed a lawsuit against the state of Maryland over its newly enacted tax on digital advertising sales, according to a leading advertising official.
Dan Jaffe, executive president of government affairs for The Association of National Advertisers, said the lawsuit was brought against Maryland because its “digital advertising tax is exactly the kind of proposal the Internet Tax Freedom Act bans. [It] also raises serious First Amendment and due process issues.”
Mr. Jaffe, whose organization is not part of the lawsuit, told The Washington Times that the new levy “singles out” advertisements on digital platforms, which makes it a discriminatory tax on electronic commerce in violation of the Permanent Internet Tax Freedom Act.
He also said Maryland’s method to determine how much a company will be taxed violates the Constitution’s commerce clause, which bans states from enforcing laws that are discriminatory toward interstate commerce.
The Democrat-controlled Maryland General Assembly enacted the tax late last week after overriding a veto of the measure by Republican Gov. Larry Hogan.
Under Maryland’s new law, certain companies must pay a 2.5% to 10% tax on revenue from digital advertising services in the state, based on the company’s global annual gross revenue. The tax applies to companies that collect at least $100 million in global revenue and at least $1 million in digital ad revenue in Maryland.
“One can already anticipate the howls of protest from the Maryland legislature if Virginia, for example, were to impose a higher digital ad tax on Maryland companies due to their digital activities outside Virginia even if their activity in that state is equal to or less than their Virginia competitors,” Mr. Jaffe wrote in a blog post last week.
The law also may violate the foreign commerce clause against enforcing a tax on international businesses, as well as First Amendment guarantees against targeting industry-specific media, according to an analysis by Forbes magazine.
Moreover, the Tax Foundation, an independent tax policy nonprofit, recently said Maryland’s law could lead to “double taxation” in which “multiple entities [pay] taxes on gross receipts from the same ad being served to a viewer.”
The law directs Maryland’s comptroller to adopt the “regulations that determine the state from which revenues from digital advertising services are derived.”
Alan Brody, press secretary for Comptroller Peter Franchot, said that the office has established an internal work group to respond to the law.
“Because Maryland is the first state to adopt a digital ad tax, we’ll be working with counsel, tax practitioners, the tech industry, advertising companies, academia and other stakeholders while drafting these complex regulations,” Mr. Brody said in an email.
Opponents of the new tax worry that the tech giants will just pass the tax onto their customers and/or move their business out of the state.
In an effort to address some concerns, lawmakers cross-filed two bills that would exempt select broadcast and news media organizations from the tax and ban companies from funneling its costs to customers via a separate fee, surcharge or line-item.
But state Sen. Jason Buckel, Allegany County Republican, said last week that companies could circumvent the safeguards by raising the overall cost of advertising.
Mr. Jaffe added that the proposals will ultimately “increase its unconstitutionality by singling out taxes based on the content of the speech.”
The Maryland Department of Legislative Services estimates the tax could bring in up to $250 million, which will be used to fund a multibillion-dollar public education overhaul plan.
The National Taxpayers Union Foundation, however, warns that “the state is more likely to find itself spending a pretty penny on legal fees to defend an indefensible proposal.”