Bloomberg Tax
March 17, 2021, 8:00 AM

Will Massachusetts Jump Off the Digital Advertising Tax Cliff Behind Maryland . . . Or Look Before It Leaps?

Michael J. Semes
Michael J. Semes
Baker & Hostetler LLP

The recent froth of digital advertising tax activity in Maryland and Massachusetts demonstrates the importance of—and perils associated with—this issue.

On Feb. 12, 2021, the Maryland General Assembly overrode Governor Hogan’s veto and made Maryland the first state to jump off the digital advertising tax cliff. Less than a week later, the Massachusetts House introduced HD 3210, HD 3601, and HD 3558. While two of these bills impose tax on digital advertising for the purpose of plugging budget deficits, HD 3558 prudently proposes to study the complexities and consequences of taxing digital advertising—including the best practices of other states—before enacting a new tax. This article will compare and contrast the Maryland law with Massachusetts proposals and explain why other states should follow HD 3558’s “look before you leap” approach.

Taxing the burgeoning digital economy may appear to be an attractive cure to historic budget deficits. The legal and practical deficiencies of the Maryland and Massachusetts proposals, however, show that the attractiveness is merely a thin layer of veneer. None of these attempts to tax digital advertising fully considers the complexity of the digital economy—nor how rapidly it is evolving. For instance, over 70% of Americans are currently working from home compared to 20% before the pandemic. This seismic shift took but an instant, the digital economy’s historical pace of change. Further, its amorphous and pervasive nature amplifies the collateral and dynamic impact of taxing any aspect of the digital economy. These factors dictate that any legislature considering the adoption of a new tax on digital advertising should measure twice before cutting once. Therefore, the farsighted strategy offered by HD 3558 is far superior to the myopic view of HD 3210, HD 3601 and the recently-enacted Maryland legislation.

Massachusetts proposes three bills one week after Maryland enacts first digital advertising tax

Last month, Maryland enacted the country’s first tax on digital advertising. This author and others have pointed out that law’s shortcomings. Last month also saw Massachusetts follow suit by proposing two digital advertising tax bills—along with a bill that takes a more thoughtful path. Here’s what was proposed in the Massachusetts House a week after Maryland enacted its digital advertising tax.

HD 3558 takes a prudent route. This bill proposes to establish a special commission to study a broad range of collateral consequences of enacting a digital advertising tax, including an examination of best practices in other states. HD 3210 parrots much of the Maryland law. While some of this bill’s tweaks to the Maryland legislation may be viewed to be improvements, it leaves many unanswered questions and is simply not workable. Therefore, it should not be adopted. HD 3601 is quite similar to HD 3210, with a major difference of proposing a flat tax rate—unlike graduated rates in the Maryland law and HD 3210. Nonetheless, this proposal also fails to cure many of the Maryland maladies.

The prudent approach of HD 3558

This bill calls for the establishment of “a special commission to conduct a comprehensive study relative to generating revenue from digital advertising that is displayed inside of Massachusetts by companies that generate over $100 million a year in global revenue[.]” This aspect of the report is interesting because Maryland imposes its digital advertising tax on companies with at least $100 million in global annual gross revenues. Therefore, it appears that the sponsors of this bill are aware of and focused on Maryland’s approach. This requirement may also be directing the commission to monitor legal challenges to the Maryland legislation that have already been filed.

HD 3558 requires the commission to complete the report by Feb. 15, 2022. It also requires the report to include, among many other items, recommendations for changes in laws to achieve an equitable and adequate system of taxation; and a description of best practices of other states. This latter requirement is in and of itself a best practice.

HD 3210 borrows much of the Maryland legislation

HD 3210 defines many terms (e.g., user, digital interface) the same as the Maryland law. It also, like Maryland, provides that a person required to file a digital advertising tax return include “an attachment that states any information that the commissioner requires to determine annual gross revenues derived from digital advertising services in the commonwealth.”

Although HD 3210 borrows several Maryland definitions, it provides a broader definition of “digital advertising” by also including “promoted, boosted, or sponsored content.” This addition raises the question of what ancillary types of services that would not otherwise fit within the definition of “digital advertising” this language may ensnare.

HD 3210 Repeats some of Maryland’s sloppy drafting

In an apparent oversight, HD 3210 uses the phrase “annual gross revenues” but only defines “annual revenues.” The bill proposed to impose tax on the “assessable base,” which it defines in terms of “annual revenues,” but the bill establishes estimated returns and filing obligations on “annual gross revenues.”

HD 3210, likely unintentionally, paints with too broad a brush when it taxes advertisements that appear on any type of software (including websites, parts of websites, applications, or parts of applications), which a person with a “device” is “able to access.” For instance, does this language intend to tax an advertisement with which the user had no interaction? Shouldn’t the user at least be aware of access before the transaction is taxed? Further, how would that awareness be determined?

HD 3210 attempts to fix Maryland’s apportionment blunder

HD 3210 deviates from Maryland’s curiously circular apportionment mechanism. Section 2 of HD 3210 defines advertising services to be “in the commonwealth” when viewed by a user with an Internet Protocol address associated with Massachusetts, or who is “known or reasonably presumed to be using the device in the commonwealth.” The former provision is objective (though perhaps inaccurate) but the latter is subjective and, therefore, both invite controversy. Query whether the subjective standard may be cured in the same way Massachusetts itself (see Massachusetts 830 CMR 63.38.1(9)(d)4.c.ii(B)), the Multistate Tax Commission and several states (e.g. New Jersey, California) have created a cascade of rules for determining the location of the sale of a service.

HD 3210 applies a graduated rate that is slightly different from Maryland by applying a 5%, 10% and 15% rate based on annual gross revenues of the digital advertiser of $50 - $100 million, $100 - $200 million, and over $200 million. Because the annual gross revenues are measured by unapportioned activity, some of which occurs outside of Massachusetts, this provision (like Maryland’s) likely violates the Commerce Clause fair apportionment and discrimination requirements.

HD 3601 differs in some ways from HD 3210

HD 3601 curtails HD 3210’s unconscionably broad tax base by limiting the tax to digital advertising services directed to a person “using a device [while] connected to a computer network.”

HD 3601 also differs from HD 3210 by imposing tax at a flat rate of 5% and by determineing whether the digital advertising is in Massachusetts based solely on the user’s IP address. While the IP address standard is not as amorphous as HD 3210’s “presumed to be used” standard, it would be helpful if the bill provided more certainty, such as is provided in the market-based sourcing regulations noted above.

Finally, HD 3601 requires that the tax’s revenues be deposited into newly established funds to support local newspapers and Pre-K and After School programs. One cannot help but wonder whether this is a political maneuver designed to deflect attention from the bill’s flaws.


The plethora of states jumping on the digital advertising tax bandwagon is unsurprising given the unprecedented budgetary shortfalls looming over many state governments. But the need to protect the fisc, even with the best intentions, is no excuse to take rash actions. Nor is it prudent to follow a state that chooses to leap off a fiscal cliff without knowing how deep the litigation chasm may be. Multiple states freefalling together does not increase the odds of a safe landing.

Digital advertising tax proposals are spreading across the country like ivy, and now is the time to nip them in the bud—or at least prune them so they grow in the desired manner that best serves long term goals and interests. Massachusetts legislators may choose to follow Maryland’s treacherous path by enacting HD 3210 or HD 3601. Aalternatively, they may choose to lead by enacting HD 3558.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Michael J. Semes is Professor of Practice in the Graduate Tax Program at the Charles Widger School of Law at Villanova University and Of Counsel at BakerHostetler. He thanks Christian Jorgensen and Jonathan Onufrak, Villanova Law students, and Matt Hunsaker, BakerHostetler partner, for their helpful contributions and comments to this article.

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