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Maryland's tax on digital ads could reshape internet — if it survives legal challenges

Digital Ad Tax
Posted at 1:44 PM, Mar 05, 2021

The nation’s first tax on digital ads, targeted at big tech companies, is slated to go into effect next week — but a lawsuit filed by a group of businesses and the U.S. Chamber of Commerce hopes to stop their implementation.

The Digital Advertising Gross Revenues Tax imposes a tax on money generated from selling digital advertising in Maryland.

Major tech companies and industry groups argue it violates the 1998 “Internet Freedom Tax Act” — a law that prohibits discriminatory taxes on e-commerce.

Lilian Faulhaber, a Georgetown law professor, says states across the country are watching how the lawsuit plays out before instituting their own laws.

“Some states have at least considered bills like this. I know New York state Washington state some other states have seriously considered it, and are considering at least proposing this type of legislation,” she said. “I'm betting that there are other states that if this goes forward, and if it stands up to legal challenge, other states will be very interested in passing something like this.”

Faulhaber says the big question is if the tax is different enough from retail sales tax on remote sellers, which is allowed under the Internet Freedom Act.

Maryland wants to use the revenue from the tax to fund K-12 schools. Supporters estimate it would bring in $250 million in the first year.

“I think the pandemic definitely made the need for revenue more noticeable — the seeming inequality between big tech and a lot of citizens,” Faulhaber said. “The fact that there seemed to be significant revenues that are being earned during the pandemic versus the experience of states, where they're having these budget shortfalls and they can't necessarily provide the services they feel they need to.”

If Maryland’s law doesn’t stand up to the legal challenge, states could try other types of digital taxes.

Faulhaber says there are also questions if the Internet Freedom Tax Act should be amended because it focuses on old terminology. It’s also unclear which types of taxes the original drafters had in mind when the bill was originally passed.