What is important?

In October 2022, the first U.S. state laws taxing digital advertisements was declared unconstitutional by a Maryland Circuit Court, as it violated the prohibition on state interference with interstate commerce. While this law can be appealed to the Supreme Court, the decision represents a major legal inflection point in the U.S. political conflict over taxing digital advertisements. Firms should be aware of the U.S. state legislature’s growing interest and activity in taxing digital advertisements. It could be advisable to plan a financial contingency of 2% - 12% increase in the digital advertising budget in case of new successful legislation. 

What happened?

On October 17, 2022, the Anne Arundel County Circuit Court of Maryland ruled against the State of Maryland and Maryland Comptroller declaring that the America’s first tax targeting digital advertisements was unconstitutional. Judge Alison Asti noted in her decision that the tax violated the US Constitution’s prohibition on state interference with interstate commerce and the First Amendment, as certain sites were taxed but others were not. 

The Digital Advertising Gross Revenues Tax would impose 2.5% - 10% tax on a firm depending on the firm's digital advertising’s annual gross revenue, where 10% would be applied to companies making at least $15 billion in annual revenue. This Law covers “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” It would also require any entity, “that reasonably expects estimated digital advertising gross revenues tax for a calendar year to exceed $1,000,000 [within the State of Maryland] shall file a declaration of estimated digital advertising gross revenues.” The Act was passed in 2021, overriding the Governor’s veto. 

Why does it matter? 

The Maryland decision is a major inflection point in the conflict over tax of digital advertisements in the United States. Washington, Oregon, Arkansas, Indiana, New York and Connecticut have various bills taxing social media advertisements and personal data sales. Many of these bills are modeled on-each other, and any legal decision could have significant impacts on each other. Currently, both the Democrat and Republican political parties are growing increasingly concerned with large technology companies' media power and content standards. Additionally, the average American’s view of large technology corporations has been declining over the last few years, especially since 2016, inspiring the name “techlash.” These shifting cultural attitudes could provide a fertile environment for successful legislation. If legislation taxing digital advertisements were to be successful, it could have significant impacts on the digital media ecosystem. There is a possibility that major technology companies would divide their assets into subsidiary companies in order to reduce their tax burden. Further, current research has indicated that taxes on digital advertisements not only creates the opportunity for double taxation but also  consumer price increases. 

How likely is it to affect you?

If the case reaches the U.S. Supreme Court, a decision could have significant impacts on other laws centered on taxing digital or social media advertisements. Ruling in favor of the State of Maryland could lead major internet firms to raise future digital advertising prices in response to the ruling. In other countries, Google and Facebook have increased prices, as a pass-through, in response to new taxes on digital advertisements: Google raised prices 2% in the United Kingdom and 5% in Turkey; Amazon raised prices 2% in the United Kingdom; Facebook raised prices 6% in Malaysia. 

Given that the current Supreme Court is composed of a majority of justices appointed by Republican Presidents, it is more likely that they will uphold the pro-business decision. Business should begin establishing a financial contingency plan, of an increase 2 - 12%, in case of new laws. 

What’s next?

The Maryland Attorney General Biran Frosh will appeal the court’s decision striking down the Digital Advertising Gross Revenues Tax. However, State Comptroller Peter Franchot expressed his concern at successfully appealing the decision.