On January 29, 2020, the Maryland State Senate’s Budget and Taxation Committee heard testimony on Senate Bill 2, which would create the Digital Advertising Gross Revenues Tax. The tax would be imposed on a taxpayer’s Maryland gross revenues from digital advertising services at up to a 10% rate. After brief introductions by the bill’s sponsors – Senators Miller and Ferguson – the Committee heard testimony from an additional twenty-one witnesses. An archived video of the hearing is available here.

Senators Miller and Ferguson emphasized that the purpose of Senate Bill 2 is to fund the state’s public education initiative. It is one of numerous bills being considered to pay for this initiative.

The most notable witness in support of the bill was Professor Paul Romer, an economist who wrote a New York Times opinion last year that advocated for a tax on targeted digital advertising. However, his comments were dedicated to combating targeted advertisements via this tax, rather than on bringing in additional tax revenue for the state of Maryland from broadly taxing all digital advertising.

Summary of Senate Bill 2

Senate Bill 2 would create the new Digital Advertising Gross Revenues Tax, which would be imposed on a person’s annual gross revenues derived from digital advertising services in Maryland. The definition of “digital advertising services” broadly includes “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The tax rate varies from 2.5% to 10% of the annual gross revenues derived from digital advertising services in Maryland, depending on the taxpayer’s global annual gross revenues. To be required to pay the tax, the taxpayer must have at least $100,000,000 of global annual gross revenues and at least $1,000,000 of annual gross revenues derived from digital advertising services in Maryland.

Digital advertising services are sourced to Maryland based on either: (1) the user’s IP address; or (2) the knowledge or reasonable suspicion that the user is using its device in the state.

Budget and Taxation Committee Hearing

Witnesses Opposed to Senate Bill 2 

Witnesses from various industry and trade groups spoke in opposition to the bill at the hearing, including the Association of National Advertisers, the Maryland Chamber of Commerce, the Motion Picture Association, and the Council On State Taxation. Although most witnesses mentioned their support for funding Maryland’s public schools, the witnesses did not believe that the Digital Advertising Gross Revenues Tax was the appropriate mechanism. Specifically, several witnesses testified to the legal and constitutional problems with the bill, noting that the Digital Advertising Gross Revenues Tax may violate the Internet Tax Freedom Act and several provisions of the United States Constitution. The witnesses also raised the following, additional issues with the bill:

  • The tax would fall on Maryland’s small businesses and residents – instead of the intended large, global companies – as companies are likely to pass the tax on to consumers by raising prices. These added costs could hurt Maryland residents in other ways, too, such as by websites erecting paywalls to make up for lost revenue;
  • Taxpayers will struggle to comply with the tax, especially as to how to source a share of the company’s digital advertising service revenue to Maryland;
  • Because the definition of digital advertising service is broad, unintended, additional advertising could also be subject to the tax, such as in a video, podcast, or sales calls made over VoIP;
  • The tax unfairly singles out one industry for taxation;
  • Digital advertising helps the growth of small businesses and lets them reach new customers they would not have been able to reach using traditional advertising;
  • This tax may discourage companies from staying or investing in Maryland and may make the state less competitive; and
  • Other states have attempted to implement broad-ranging advertising taxes previously, but the proposals were either rejected or enacted and subsequently repealed (e.g., Arizona, Florida and Iowa) because the taxes hurt local economies and were difficult to administer.

Witnesses in Support of Senate Bill 2 

The key witnesses speaking in favor of Senate Bill 2 were Professor Romer and his father, former Colorado Governor Roy Romer. At the hearing, Professor Romer testified that the market for digital advertising is broken and that a tax on it could restore the conditions for the market to work. He envisions that the punitive nature of the Digital Advertising Gross Revenues Tax would create a market for digital services that do not profit from tracking and targeting consumers.

Professor Romer also envisions this tax as having a narrow scope. He wants to impact targeting and tracking advertisements, not the digital equivalent of broadcast advertising.

Representatives from the Maryland State Education Association, Maryland Center on Economic Policy, Strong Schools Maryland, and SEIU also testified in support of the bill. But one witness from the Maryland Center on Economic Policy stated that he would support a version of the bill that has amendments to avoid a conflict with federal law, such as by expanding the bill to all advertising.

Committee’s Response

The Committee’s senators asked questions primarily to Senator Ferguson and Professor Romer. Concerns were raised about whether other states have implemented similar taxes and whether Maryland currently taxes advertising.

In response to a question posed by one senator regarding the similarities between the OECD digital tax proposals and other digital taxes proposed and enacted in Europe and Senate Bill 2, Professor Romer explained that the taxes have important differences. The European taxes are intended to fix issues with corporate income tax, such as the ability to shift income around the world. He, instead, is worried about digital advertising undermining our electoral system and having other negative effects. Professor Romer even commented that he wants targeted advertising to stop and that he would be happy if the tax resulted in no revenue.

Another senator was concerned about a possible Internet Tax Freedom Act violation, stating that he knew the tax would need to be expanded to all advertising. He was also concerned that the state would raise the threshold of gross revenues high enough to avoid targeting print media, but that would also cause the tax to impact only a couple of companies and potentially violate the Commerce Clause.