This afternoon, Gov. Larry Hogan (R) vetoed a proposed first-in-the-nation digital advertising tax that would have imposed rates of up to 10 percent on digital advertising served to Marylanders. Although the bill ostensibly targets large technology companies and advertising platforms, much of the burden would fall on Maryland businesses and consumers, and the timing couldn’t be worse.
The bill originally passed with a veto-proof majority, so its final disposition depends on whether any legislators change their minds, particularly in light of the current COVID-19 crisis. Maryland’s revenue needs are more significant now, but lawmakers might well be increasingly wary of a tax that will hit businesses as they attempt to recover from the economic downturn.
The proposed tax, imposed at rates ranging from 2.5 to 10 percent on gross revenue from advertising into Maryland, faces serious legal headwinds. The applicable rate is based on the gross revenues of the advertising company, not their in-state activity, just one of several ways the law likely runs afoul of U.S. constitutional requirements. The bill also appears to run headlong into the federal Internet Tax Freedom Act, which prohibits imposing taxes that single out e-commerce. A tax on all advertising, including digital advertising, would not violate that federal law, but singling out digital advertising without imposing a tax on similar offline activity, almost certainly does.
It is pleasant for many to think that this tax will just be borne by profitable tech companies somewhere out west, but what might be pleasant suffers from the disadvantage of being untrue. The reality is that much of the burden will fall on Maryland businesses, many of them small businesses imperiled by the COVID-19 pandemic.
If the tax costs of advertising into Maryland rise, those costs will be passed on to advertisers, and many of those advertising to Maryland residents will themselves be Maryland-based businesses. This isn’t a tax on corporate behemoths a continent away; it’s a tax on local restaurants and other small businesses advertising to reestablish their customer bases once the economic recovery begins. And to the extent that the tax falls on all such Maryland businesses, not only will much of the cost be imposed in Maryland, but some of it also will be passed along to consumers themselves.
The Maryland digital advertising tax is modeled after digital services taxes in Europe, bills that, while deeply flawed, are intended to close a tax loophole. But it’s a loophole that does not exist under the American system of state taxation, meaning that the digital advertising tax is a form of double taxation. There is no justification for a targeted tax—let alone a poorly targeted tax—singling out an arbitrary component of business activity when that business’s profits are already taxed.
But the argument against digital advertising taxes isn’t just, or primarily, that they are unfair or represent bad tax policy. It’s that they don’t work as advertised.
They raise costs for in-state businesses. They have the potential to raise costs for in-state consumers. And they can even limit consumer choice by making it harder to provide free, ad-supported digital content to Maryland residents. A digital advertising tax results in more content going behind paywalls, and some content disappearing altogether.
Like most states, Maryland faces serious revenue losses due to the COVID-19 pandemic. Difficult choices about both taxes and spending lie ahead. But across the country, lawmakers appear to agree that now is not the time for taxes that imperil the recovery by interfering with businesses’ ability to rehire and reestablish their clienteles. That’s exactly what a digital advertising tax would do. And it’s something lawmakers will have to consider carefully when they return to take up the governor’s veto.
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