Earlier today, the Maryland Senate Budget and Taxation Committee voted to pass out of committee Senate Bill 2, which would impose a new tax on digital advertising services. The committee amended the bill to include a new sourcing provision. Now, the Comptroller of the Treasury must determine when gross revenues are derived from digital advertising services in Maryland. The bill will next head to the entire Senate for second reading and consideration.
Summary of Senate Bill 2
Senate Bill 2, along with its companion bill, House Bill 695, proposes a new Digital Advertising Tax, which would be imposed on the 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 a taxpayer’s global annual gross revenues. To be required to pay the tax, a 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 Tax Sourcing
The introduced version of Senate Bill 2 proposed to source (and tax) digital advertising services to Maryland based on either: (1) a user’s IP address; or (2) the knowledge or reasonable suspicion that a user is using its device (which receives the advertising) in the state. However, the amended version that passed out of committee strikes these sourcing provisions and proposes an apportionment fraction to determine the amount of digital advertising services revenues attributable to Maryland. The amendment relies entirely on the Comptroller to develop regulations to determine sourcing. The sourcing provision now states:
(1) For purposes of this title, the part of the annual gross revenues of a person derived from digital advertising services in the State shall be determined by using an apportionment fraction:
(I)The numerator of which is the annual gross revenues of a person derived from digital advertising services in the State; and
(II)The denominator of which is the annual gross revenues of a person derived from digital advertising services in the United States.
(2) The Comptroller shall adopt regulations that determine the State that revenues from digital advertising services are derived from.
Eversheds Sutherland Observation: Similar to some European digital services taxes, Maryland S.B. 2 would use an apportionment formula to determine the taxable gross annual revenues based on a ratio of Maryland gross revenues from digital advertising services to total U.S gross revenues from digital advertising services. Though some of the European DSTs also use an apportionment formula, those regimes typically use factors based on the proportion of advertisements or users in the country.
It is unclear how the Comptroller will determine when digital advertising service revenues are derived from a particular state.
Eversheds Sutherland Observation: The new sourcing provision legislatively punts responsibility for an important tax policy decision to the Comptroller. This broad grant of legislative prerogative to the executive branch to draft a crucial aspect of the tax, at a minimum, creates the appearance of a separation of powers violation.
S.B. 2 will next be voted upon by the full Maryland Senate on second reading. To be enacted, the bill will still need to pass the Senate and the House of Delegates and either be signed by the governor or overcome his veto. If enacted, the bill may not survive judicial scrutiny because it may violate federal and constitutional law.