Cancellation of the right of veto at the General Assembly
On February 12, 2021, the Maryland General Assembly overruled Governor Larry Hogan’s veto of HB 732 (2020) (the Act), a bill enacting a digital advertising services tax, the first of its kind, on annual gross revenue from the provision of digital advertising services in Maryland. The tax applies only to businesses with annual gross revenues (without deducting expenses) from all sources of $100 million or more. The rate of the tax varies, depending on the level of worldwide gross annual revenues, from 2.5% (for companies whose worldwide gross annual revenues are less than or equal to 1 billion dollars) to 10% (for companies whose global annual gross revenues exceed $15 billion). ). The rate applies to gross revenue from the provision of digital advertising services in Maryland. For example, a business subject to the 10% rate with $100 million in revenue attributable to the performance of digital advertising services in Maryland would be liable for an annual tax of $10 million which will be reported and paid on a quarterly basis throughout the year.
See House Bill here.
Even though the legislation states that the tax is effective July 1, 2020, under the Maryland Constitution, vetoed legislation becomes effective no later than the effective date of the bill. of law or 30 days after the cancellation of the veto. Based on today’s override of the veto, the bill is expected to come into force on or about March 14, 2021. However, as the legislation is “applicable to all tax years commencing after December 31, 2020”, the digital advertising services tax will be retroactive to the start. of this year.
Imminent compliance deadlines
The Digital Advertising Services Tax applies on an annual basis with reporting due by April 15 of the following year. However, the tax also requires quarterly reporting and payment for some taxpayers. By April 15 of the current year, taxable persons are required to file an estimated tax return showing the amount of Maryland digital advertising services tax they expect to owe for the calendar year. As part of the return and quarterly with returns filed thereafter, the law requires that they pay at least 25% of the estimated annual tax shown on the return. There is a penalty of up to 25% of the amount of any tax understatement. The law also provides for a fine of up to $5,000 and criminal penalties of up to five years in prison for willfully failing to file the annual report.
Deposit and tips to be determined
At the time of this writing, the Maryland Office of the Comptroller has not released any of the forms needed to file the estimated tax return or return due April 15 of the current year. Nor has the comptroller’s office passed regulations as required by law providing guidance on when ad revenue is generated in Maryland, likely a daunting and complicated task as it is a new issue that other states have not addressed. Many aspects of the law are vague at best and likely need to be more solidly clarified through administrative guidance that has yet to be released. For example, the definition of “digital advertising services” (that’s to say, “advertising services on a digital interface”) includes a non-exhaustive list of examples including “other comparable advertising services”. As adopted, the scope of digital advertising services remains unclear. Without guidance from the Monitor on the scope of these conditions, taxable persons will have difficulty determining what income is subject to tax. If the Monitor does not publish the necessary forms or issue interpretative guidance by April 15 this year, those subject to the digital advertising services tax will have difficulty meeting their new compliance obligations.
Legal Challenge Anticipated
Based on his e-commerce discrimination and other constitutional concerns noted below, we expect that a lawsuit will be filed in federal court seeking injunctive relief and declaratory relief from the grounds that the Internet Tax Freedom Act (ITFA) overrides the tax and violates the US Constitution. . Specifically, the suit will claim the Digital Advertising Services Tax: (1) is pre-empted by the ITFA because it imposes a “discriminatory e-commerce tax”, (2) violates the Dormant Commerce Clause and the due process of the Fourteenth Amendment of the United States Constitution by targeting and disproportionately promoting the interests of the state over interests outside the state, (3) violates the Trade Clause of the United States Constitution by preventing the federal government from speaking with one voice, (4) is void for vagueness under the Due Process Clause of the Fourteenth Amendment and invites arbitrary application and (5) violates the First Amendment by burdening protected speech (advertising) in a way that is not essential to the achievement of the substantial interest of the government. As a result of these claims, the lawsuit will ask the federal court to declare the digital advertising services tax preempted and unconstitutional and to permanently bar the monitor from enforcing it.
Taxpayers with obligations under the new digital advertising services tax should explore options to protect any right to reimbursement of estimated tax payments if the legal challenge is successful. Companies wishing to obtain more information about the legal challenge and the steps necessary to preserve their reimbursement rights under Maryland law are encouraged to contact the authors directly.
Changes on the horizon
Proponents of the Digital Advertising Services Tax have recently introduced amendments (HB 1200 and SB 787) that would exclude radio and television broadcasters and news media from the scope of the tax. The amendment would also prohibit taxable persons from passing the tax on to customers through a fee, surcharge or separate line item on the bill. These amendments are still early in the legislative process, but are on a fast track and could become law before the original reporting and payment due date in a few months. Stay tuned for more details as these additional bills roll out.
Practical note: The reporting and payment deadlines for the new digital advertising services tax enacted today are looming, and many questions remain unanswered and more specific details regarding the scope and application of this tax one-of-a-kind state. With legal challenges anticipated and guidance on many key elements of the new tax required for compliance, we anticipate a difficult compliance process and a clear need for legal counsel to help us navigate this new tax. Unfortunately, Maryland isn’t the only state to recently consider a digital advertising services tax. In fact, at least six additional states (Connecticut, Indiana, Montana, New York, Oregon, and Washington) are actively considering the same or similar legislative proposals in their current legislative sessions. A successful trial will chill efforts in those other states.
Companies that believe they may be subject to the Maryland Digital Advertising Services Tax should contact the authors immediately to discuss their potential compliance obligations created by the February 12, 2021 Maryland General Assembly action. , overriding Governor Hogan’s veto of the law.