Update 11/11/22 : Maryland’s state judge Alison Asti ruled the digital advertising tax in violation of the U.S Constitution as well as the federal Internet Tax Freedom Act. This decision could end in a landmark US Supreme Court decision down the line on the reach of federal law prohibiting internet-only taxes and other matters of state tax sovereignty.

Maryland is still planning on moving forward with regards to their digital advertising tax, even as a legal battle ensues regarding the constitutionality of the tax. 

What is The Digital Advertising Tax?

The digital advertising tax is targeting large social media outlets, web search engines, and digital communication companies such as Facebook, Google and Amazon.  A business must have over $1 million of digital advertising revenue in Maryland in order to be subject to the tax.  The tax rate ranges from 2.5% for businesses with over $100 million of annual gross revenues (from any source) up to 10% for businesses with annual gross revenues over $15 billion.  The tax became effective January 1^st of this year, with initial quarterly estimated payments due April 15^th.  Maryland still does not have the estimated tax payment forms available, but the hope is to have these available by the end of March.

Businesses that may be subject to the tax are closely monitoring various challenges to this tax by the likes of the U.S. Chamber of Commerce and trade associations in federal court as well as Verizon Media and Comcast Cable Communications through the Maryland Courts.  The common theme is businesses that may be subject to the tax will comply with the filing while closely monitoring the legal battle for possible refunds down the road.

What Should Be Considered in Reporting?

In order to be prepared and understand what and how the digital advertising tax should be reported and calculated, the following should be considered based upon recent actions by the legislators in Maryland:

• The tax may not be passed on directly to the business’s customers through a fee, surcharge or line item.
• Digital advertising services do not include advertising owned or operated by broadcast entities or new media.
• Regulations provide for device-based sourcing for apportionment purposes, the factor having the numerator being the number of devices accessing the digital ad inside Maryland over the denominator being number of devices accessing the ads from any location.  A business should ensure that this information is available for calculation purposes.  It should also be noted that the Regulation differs from the statute that provided for a factor of Maryland based digital advertising revenue.
• Maryland also provides for a throw-out rule from the denominator for any device in which the location can’t be determined.

We will be monitoring the legal battles going forward, but if you have any questions or concerns, contact Jason Skrinak at jason@pivotsalt.com