Bloomberg Tax
Jan. 17, 2020, 9:45 AM

Digital Tax Bill in Maryland Could Face Legal Hurdles

Isabel Gottlieb
Isabel Gottlieb
Colin Wilhelm
Colin Wilhelm

A proposed tax on digital advertising revenues in Maryland could run into significant legal barriers.

The measure targets the revenue of large companies that profit from showing online advertising to users in Maryland. The tax rate would range from 2.5% to 10%, depending on companies’ annual gross revenue.

Because the proposal targets online advertising, tax specialists expect legal challenges arguing that it would violate the free speech guarantee of the First Amendment, as well as a 2016 federal law prohibiting discriminatory taxes on digital commerce.

The bill, introduced Jan. 8, is sponsored by Maryland Senate President Bill Ferguson and former Senate President Mike Miller, both Democrats. Ferguson didn’t respond to requests for comments, but he told the Washington Post Jan. 10 that the tax was inspired by a proposal from 2018 Nobel laureate in economics Paul Romer.

Practitioners said the measure could affect tech giants like Alphabet Inc.'s Google and Facebook Inc., as well as online advertising companies such as those that track users’ data to serve them ads, online streaming services that are on an advertising rather than subscription model, and even TV channels or newspapers with online presence that meet the revenue threshold.

If Maryland passes the bill, it would be the first state with a tax of this kind on digital revenue, said Ulrik Boesen, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation. Other states have expanded their existing sales taxes to include purchases of digital goods or services rather than levy new taxes on digital services.

The European Commission tried to pass an EU-wide digital services tax, but it stalled in early 2019 when countries couldn’t agree. Since then, similar taxes have been implemented in countries including France, Italy, and Turkey. Austria expanded an existing tax on advertising to encompass revenue from digital advertising shown to Austrian users. The U.S. has opposed the French tax vigorously.

‘It’s Protectionist’

Even if Maryland lawmakers pass the bill, it could be challenged on constitutional and legal grounds, said Ruth Mason, a professor of law and taxation at the University of Virginia School of Law.

The measure’s size threshold—it only applies to companies with more than $100 million in annual revenue—would likely mean that all or most of the companies taxed are based outside of Maryland, Mason said. That’s a potential violation of the U.S. Constitution’s dormant commerce clause, which has been interpreted to say that states can’t discriminate against interstate or international commerce, she said.

The French law has raised similar questions of discrimination, since it also contains a size threshold that means the majority of companies paying the tax aren’t French. Both the U.S. and the EU have prohibitions on discriminatory taxes.

“The infirmity in the Maryland law is exactly the same as the infirmity in the French law, and for the same reasons: It’s protectionist,” Mason said.

In 2016 Congress used its commerce clause authority to make permanent the 1998 Internet Tax Freedom Act with a provision banning taxes that discriminate against digital commerce, which the proposed Maryland tax might violate.

Under the ITFA, states can’t treat activity on the internet differently than analogous activity in the real world, said Steve Wlodychak, principal in indirect tax at EY in Washington.

“This law strikes me as violating that prohibition,” said Nicole Kaeding, vice president of policy promotion and economist for the National Taxpayers Union. The fact that Maryland doesn’t currently tax advertising revenue of companies that offer other forms of advertising, like TV, radio, or billboards could add fuel to opposing arguments. “That seems discriminatory, that one type of advertising is taxed but not the other,” Kaeding said.

The Internet Association, a trade group that includes Inc., Facebook, and Google among its members, said it has “serious initial concerns” with the tax.

“The bill appears to stand on questionable legal footing and unfairly discriminate against a single segment of the advertising sector,” Robert Callahan, the association’s senior vice president of state government affairs, said in an emailed statement.

First Amendment

The proposed tax could also face a First Amendment challenge, since a large degree of political advertising takes place online. In 1958 the Maryland Court of Appeals ruled that a 4% sales tax on television, newspaper, and radio advertising proposed by the city of Baltimore was unconstitutional.

The tax could be challenged on First Amendment grounds because it favors one avenue of speech over another, Wlodychak said.

Compliance hurdles could also be a problem, Boesen said. The bill would ask companies to track users’ IP addresses to determine whether they are in the state when they are viewing an ad.

It won’t be easy to determine exactly where a person is when they are viewing an ad, he said—particularly if someone is near or crossing a state border while being served an ad on a mobile device, or using a VPN to mask their location.

It’s also unclear whether ad views would be taxable if they are hidden by an ad blocker or served to an online bot, or if a television ad is viewed by someone streaming video on their computer, Boesen added.

Plus, it would be difficult for Maryland’s tax authority to enforce, Wlodychak said. For example, the state may not be able to assess or enforce the tax owed by a foreign company that met the revenue threshold and had Maryland users, but didn’t pay tax in the U.S.

“What works in France, will not work in Maryland,” Wlodychak said.

To contact the reporters on this story: Isabel Gottlieb in Washington at; Colin Wilhelm in Washington at

To contact the editors responsible for this story: Meg Shreve at; Vandana Mathur at; Kathy Larsen at