Maryland Digital Ad Tax: Legal and Operational Update

Due to the legal uncertainty and lack of regulatory clarity for implementation, the Maryland digital advertising tax, which became effective on Jan 1 of this year, remains a significant quagmire for large digital advertisers who advertise in the state. Despite this uncertainty and the likelihood of a legal reversal, Maryland Comptroller Peter Franchot (D) has not yielded to requests from industry to stay the law until it is fully litigated.   In spite of recent unfavorable legal updates, his office has taken steps this month to issue the estimated tax forms needed to help covered entities to file their estimated quarterly tax payments as part of their obligations under the law.

The Maryland digital advertising tax—applied to gross revenue derived from digital advertising services—has a rate escalating from 2.5 percent to 10 percent of the advertising platform’s assessable base based on their annual gross revenues from all sources (i.e., not just digital advertising, and not just in Maryland). The graduated rate applies to tax entities with more than $1 million in gross revenues from digital advertising services in Maryland AND $100 million in annual gross revenues. However, it is not a typical progressive tax, as the rate applies to all taxed activity, not just the marginal amount.

Important for agencies, in 2021, the legislation’s lead Senate sponsor and President of the Maryland Senate, Bill Ferguson (D-46), clarified that he doesn’t believe that the tax would be levied against a company reselling ad space to a marketer client. Instead, he explained that the legislative intent of the bill is to tax a digital company selling the original advertising space. The 4As Government Relations is continuing to explore opportunities to codify this specific exemption.

Updates to Federal and State Legal Challenges

A constitutional challenge to Maryland’s digital ad tax by Comcast and Verizon will advance after a state court judge largely denied the state’s motion to dismiss the case. The case is Comcast of California Maryland Pennsylvania Virginia West Virginia LLC, et al. vs. Comptroller of the Treasury of Maryland (C-02-CV-21-000509).

In a decision on March 14, Anne Arundel County Circuit Court Judge Alison Asti found no basis to grant the Maryland Comptroller’s motion to dismiss the challenge to the digital advertising gross revenues tax. 

The judge, who ruled from the bench, rejected the communications companies’ argument that the legislature had impermissibly delegated its taxing authority to the comptroller., However, the judge also found that Comcast and Verizon are not obligated to exhaust administrative remedies to have the case heard in state court. Furthermore, the judge ruled that Comcast and Verizon could proceed with constitution and tax freedom arguments.

A summary judgment on the case is expected soon.  The state case is expected to be resolved by the end of the year. 

In a separate case, Chamber of Commerce of the United States of America, et. al., v. Franchot (case 21-cv-00410-LKG), U.S. District Court Judge Lydia Griggsby ruled on March 4 that the court is precluded by the Tax Injunction Act (TIA) from reviewing Maryland’s digital ad tax, thereby dismissing the case and punting the matter to the sole discretion of the state court (see case above). 

However, the judge also ruled that the U.S. District Court in Baltimore may review a challenge to an amendment to the Maryland Digital Ad Tax Act (SB 787) that prohibited companies from directly passing the tax’s cost onto consumers or digital ad resellers. Her order determined that a challenge to this provision does not fall within the Tax Injunction Act because it does not involve a challenge to the assessment, levy, or collection of the Tax. Plaintiffs indicated they will fight on. 

Maryland Comptroller’s Office Issues Digital Ad Tax Form

The Maryland Comptroller’s office is moving forward with plans to collect the first round of quarterly estimated payments for the Maryland digital advertising tax on or before April 15, 2022. At the eleventh hour, the office issued its 600D-Declaration of Estimated Digital Advertising Gross Revenues Tax form. Each entity that expects to have annual gross revenues derived from digital advertising services in Maryland at or exceeding $1M is required to file a declaration of estimated tax quarterly, on or before June 15, September 15, and December 15 of each year, in addition to the annual return and quarterly tax declaration on or before April 15. 

The actual tax return, for taxes due on annual gross advertising revenue attributable to Maryland, will be published in December, Debora Gorman, deputy director of the Revenue Administration Division, said in an email in mid-March. 

For additional guidance and requirements for covered entities in estimating tax obligations, please review the final guidance issued by the Maryland Comptroller’s office.

For questions or more information about these developments in Maryland or other digital advertising act issues, please contact Alison Pepper.