The Maryland legislature overrode Governor Larry Hogan’s veto of a new tax on digital advertising (H.B. 732) on February 12, 2021, making Maryland the first state in the country to adopt a tax on digital advertising.
The new tax on revenue earned from digital advertising applies a graduated rate based on the taxpayer’s global annual revenue applied to an assessable base (annual gross revenues derived from digital advertising services in the state) and is effective for tax year 2021. Each person that, in a calendar year, has annual gross revenue derived from digital advertising services in the state of Maryland of at least $1 million must file a return with the Maryland Comptroller on or before April 15 of the next year and pay quarterly estimated taxes. Each person that reasonably expects their annual gross revenue derived from digital advertising services in the state of Maryland to exceed $1 million must file a declaration of estimated tax on or before April 15 of that year and complete quarterly estimated tax returns.
The digital advertising tax will be imposed at the following rates:
According to the legislation, digital advertising services include advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services. A “digital interface” is any type of software, including a website, part of a website, or application, that a user is able to access.
Under the Maryland Constitution, veto override legislation is effective 30 days after the override vote, March 14, 2021 in this case. However, litigation is expected for this controversial tax. (H.B. 732, Laws 2020, effective as noted above)
UPDATE: The U.S. Chamber of Commerce and groups such as the Internet Association, whose members include Amazon, Facebook and Google, have filed a lawsuit over the digital advertising tax implemented in Maryland one week prior. They argue that this tax (the first of its kind) is unconstitutional and incompatible with federal laws that prohibit targeting online services on the state level (Civil No. 21-cv-410, D. Md., filed February 18, 2021).
UPDATE: The Maryland Comptroller proposed new regulations for the digital advertising tax (DAT). The proposed regulations adopt a device-based sourcing rule, “The Comptroller proposes to calculate the numerator of the apportionment fraction (i.e., gross revenues from digital advertising in Maryland) by looking to whether the device showing the advertising is in Maryland.”
The proposed regulations also include provisions for DAT returns and declarations, requiring taxpayers expecting to owe upwards of $1 million in DAT tax in a calendar year must file a declaration of what they expect to owe.
(Maryland Register, Proposed COMAR 03.12.01.02.A (Aug. 31, 2021))