As e-commerce business continues to grow and evolve, the US tax landscape attempts to follow. However, taxation on digital activity is not always a clear or easy path. For example, in Maryland the constitutionality of its 1st in the nation tax on digital advertising gross revenue has been challenged.
Digital Advertising Gross Revenue Tax
In 2021, Maryland was the first state to impose a digital advertising gross revenue tax on certain digital advertising revenue. The tax became effective in 2022 and was quickly challenged in the courts because the circuit court found it to be unconstitutional and in violation of the Internet Tax Freedom Act.
Maryland Digital Advertising Tax is Back
On May 9, 2023, the Supreme Court of Maryland issued an order that brought back the state’s digital advertising tax—previously deemed unconstitutional by a Maryland circuit court. The constitutionality of the tax was not addressed by the Supreme Court’s decision; instead, it invalidated the lower court’s ruling due to lack of jurisdiction since the taxpayers who contested the tax had not completed the necessary administrative procedures.
Who Does the Maryland Tax Apply to?
The Maryland tax is applicable to persons with global annual gross revenue of at least $100 million and gross revenues from digital advertising in Maryland of at least $1 million. The rate of tax can vary from 2.5% to 10%. While these Maryland tax thresholds might not be applicable for smaller companies, the outcome of this appeal is broadly relevant for many reasons.
What Are the Potential Outcomes of This Appeal?
- At least 11 states have new or stalled proposals to tax digital advertising services. The litigation in Maryland is being watched closely by other states; since Maryland’s tax on digital advertising prevailed in the appeal, many states are expected to take action to impose a similar tax.
- Since each state’s tax laws are unique, other states may have lower thresholds, casting a larger net to apply to more taxpayers.
- Foreign sellers may be subject to US state sales and indirect tax even if they do not have a Permanent Establishment (PE) in the US. Therefore, global providers of digital advertising services also need to understand the impact of the Maryland appeal.
Continue the Conversation
Now that the Supreme Court of Maryland has made their decision and brought back the digital advertising tax, we must acknowledge the trend will continue for states to attempt to tax the sales of intangibles. This could include anything from emerging technologies to the ever-evolving physically and virtually connected offerings to consumers in the US. If you need support with tax and accounting for your global business, please reach out. We look forward to speaking with you soon.