Following in the footsteps of France, two Maryland senators recently introduced legislation to tax digital advertising revenue within the state, including such things as banner ads or search engine ads. Its sponsors may think the bill is good politics, latching onto growing anti-tech sentiment while taxing primarily out-of-state businesses that can’t complain at the ballot box. They also believe it’ll be a money-maker for them — Maryland thinks Senate Bill 2 could raise $100 million. Unfortunately, this proposal — and others like it — are likely to cost states money, because their dubious legality is going to end with the state in court for violating both federal and constitutional law.
President Obama signed the Permanent Internet Tax Freedom Act (PITFA) into law in 2016, which prevents states and localities from assessing “discriminatory taxes on electronic commerce.” Maryland does not assess taxes on traditional advertising services — rightly so, as advertising is a business input, and well-structured taxes should only fall on the final sale — so a gross receipts tax that falls only on digital advertising services and not on traditional physical advertising appears to be a fairly clear example of a tax that discriminates against electronic commerce.
And PITFA isn’t the only legal hurdle that Senate Bill 2 would have surmount. The Constitution’s Commerce Clause prevents states from enforcing laws that place an “undue burden” on interstate commerce. Though Senate Bill 2 would tax only revenues within the state of Maryland, the tax brackets that a business falls under would be determined by global revenues.
That means that larger, global businesses would likely face higher tax rates — reaching as high as 10 percent of gross revenue — than Maryland-only businesses. Businesses would need $15 billion or more in total global revenue to reach this final bracket, but this actually works against the law’s legality. It’s very unlikely that a business with operations confined to Maryland alone could reach this amount of revenue — even Maryland’s state government barely exceeds this revenue threshold!
As if that weren’t enough, Senate Bill 2 could even face First Amendment challenges. In two Supreme Court cases, Grosjean v. American Press Co. and Minneapolis Star Tribune Co. v. Commissioner, the Court has ruled that taxes that target the news media violate the First Amendment. The Maryland Supreme Court has even ruled in Baltimore v. A.S. Abell Co. that narrow advertising taxes specifically represent violations of the First Amendment.
All in all, these legal problems should render Senate Bill 2 dead on arrival, but unfortunately the Senate Budget and Taxation Committee amended and favorably reported the bill on Friday. As NTUF wrote about last week, many legislators are dismissing legal concerns as comparable to the warnings that South Dakota’s economic nexus law was unconstitutional before the Supreme Court ruled in South Dakota v. Wayfair. But Maryland’s law is no Wayfair 2.0 — Maryland is far more likely to have to shell out tons of taxpayer dollars in legal fees than it is to see a single dollar from digital advertising taxes.
Even were it to pass all these legal challenges, the legislation suffers from some significant structural issues. As a gross receipts tax, it is assessed on revenues, not profits. That’s a bad way to design a policy because it makes low-margin businesses unprofitable, leading to very severe economic impacts.
Maryland should do its taxpayers and businesses a favor and save the courts the trouble of striking down this law. The odds are simply stacked against Maryland’s digital tax being anything more than a waste of taxpayer dollars on legal fees.