Maryland to implement digital ad services tax


The Maryland Comptroller recently issued final regulations interpreting the Maryland digital advertising services tax.1 This tax, which is intended to be imposed on the annual gross receipts derived from certain digital advertising services provided in Maryland, became effective on Jan. 1, 2022.2 The regulations provide a set of rules for sourcing digital advertising services revenue based on the location of the devices where the services are accessed. The future of the tax and the Comptroller’s regulations will depend upon litigation challenging the tax on a variety of legal and constitutional grounds.


Imposition of tax


Enacted by the state legislature in February 2021 following an override of a veto by Maryland Gov. Larry Hogan, the digital advertising services tax is imposed on entities with global gross revenues of at least $100 million.3 Entities having annual gross revenues derived from digital advertising services in Maryland of at least $1 million in a calendar year are required to file a tax return.4 The term “digital advertising services” is defined to include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”5 The applicable tax rate ranges from 2.5% to 10% based on the amount of annual global gross revenues.6 The annual gross revenues derived from digital advertising services in Maryland are determined using an apportionment ratio of Maryland to U.S. gross revenue derived from digital advertising services.7

Although the enacting legislation intended for the tax to be effective beginning with the 2021 tax year, subsequent emergency legislation delayed the effective date of the tax to the 2022 tax year due to various difficulties in implementing the tax.8 The corrective legislation amended the statute to provide that “digital advertising services” does not include advertising services or digital interfaces owned or operated on behalf of a broadcast or news media entity.9 The subsequent legislation also prohibits digital advertisers from passing on the cost of the tax to customers purchasing digital advertising services via a separate fee, surcharge or line-item.10


Regulations provide for revenue sourcing


Pursuant to statutory directive,11 the Comptroller originally proposed its digital advertising services tax regulations on Aug. 31, 2021. The Comptroller’s final regulations have adopted substantially all of the proposed regulations.

The most significant regulation concerns the sourcing of digital advertising services revenue to the state.12 This regulation provides that digital advertising services revenue is derived from Maryland when any portion of those services is accessed by a device within Maryland.13 The digital advertising services revenue is then apportioned to Maryland based on a fraction of the number of devices that access the digital advertising services in Maryland over the total number of devices that access the services from any location.14 To the extent the location of a device cannot be determined, it is excluded from both the numerator and denominator.15

The sourcing regulation provides that the location of each device should be determined by the taxpayer using the totality of the data within its possession or control, including both technical information and nontechnical information included in the contract for digital advertising services.16 Each taxpayer should use the information within its possession or control which most reliably identifies the device’s location.17 Technical information which may be used to determine a device’s location includes, but is not limited to, internet protocol data, geolocation data, device registration, cookies, industry standard metrics, or any other comparable data.18 The same approach is used to source these revenues to the U.S. 19

Based on a careful reading of the statutes and regulations, the calculation begins with dividing the Maryland devices with an identifiable location by the worldwide devices with an identifiable location.20 This amount is multiplied by the gross digital advertising services revenue to determine the Maryland digital advertising services revenue.21 Next, this amount is divided by the U.S. digital advertising services revenue to determine the annual gross revenue from Maryland digital advertising services (i.e., the assessable base).22 Finally, this amount is multiplied by the variable tax rate (based on global annual gross revenues)23 to produce the Maryland digital advertising gross receipts tax.




Maryland is the first, and still the only, state to enact a tax on digital advertising services revenue. The tax is currently the subject of lawsuits that were filed in both state and federal court alleging a violation of electronic commerce under the Internet Tax Freedom Act (ITFA) as well as the Commerce and Due Process Clauses of the U.S. Constitution.24 Beyond the legal challenges, there are practical obstacles regarding implementation of the tax. The enacting legislation raises questions as to who is subject to the tax due to the lack of definitions currently contained in the statute. While the regulations provide definitions related to revenue sourcing such as “access,” “device,” and “location,” they do not include other important definitions that could further clarify the scope of the tax. Also, the tax presents various compliance issues, including difficulties in determining whether an entity derives at least $1 million in revenue from “digital advertising services in Maryland” and thus has a filing obligation. The regulations try to address these issues by including revenue sourcing provisions based on the location of the device where the services are accessed. While these regulations provide taxpayers with some latitude in determining device locations, they are likely to raise additional questions with respect to difficulties in pinpointing locations of portable devices that are in transit when ads are being accessed.

In adopting the proposed regulations with only limited non-substantive changes, the Comptroller leaves taxpayers with many unanswered questions on how to comply with this tax. The regulations do not explain the types of processes and policies taxpayers will need to adopt to identify devices in the state, track the number of views of these services, and provide Maryland this information in an understandable format. While the final regulations include terms such as “nontechnical information” and “industry standard metrics” to be used in determining a device’s location, they do not define these terms.

With the emphasis on the initial question of identification, privacy concerns may be implicated. Maryland guidance provides different methods to determine the location of a device that may pose problems for individual and device location privacy. There may be constitutional implications to the extent that a taxpayer may use these techniques in situations that, in turn, violate an individual customer’s privacy online.

Although the future of Maryland’s digital advertising tax remains very uncertain, the state’s experience has paved the way for other state legislatures to consider their own digital advertising tax bills, with legislation having been introduced during 2021 in Connecticut, Massachusetts, Montana, New York, Texas and West Virginia.25 Other states introduced legislation that would tax social media advertising on a gross receipts basis, including Arkansas, Connecticut and Indiana.26Even though these bills failed to gain traction during the 2021 state legislative sessions, they indicate a potential movement to tax the digital economy. Before proceeding with their own digital advertising taxes, other states undoubtedly are watching Maryland to see whether the state will be successful in implementing its digital advertising tax in the face of ongoing legal and compliance challenges.

As the Maryland tax is subject to multiple state and federal lawsuits, the status of such litigation should be closely tracked. Barring a quick resolution to the litigation that stops the imposition of the tax, large taxpayers should review these final regulations and carefully consider whether they are subject to this tax as the initial April 15, 2022 filing date approaches.



1 MD. REGS. CODE §§– (effective Dec. 13, 2021).
2 Ch. 37 (H.B. 732), Laws 2021, enacting MD. CODE ANN., TAX-GEN. §§ 7.5-102–7.5-301. For further discussion of the Maryland digital advertising services tax, see GT SALT Alert: Maryland enacts digital ad gross revenues tax.
3 MD. CODE ANN., TAX-GEN. § 7.5-103.
4 MD. CODE ANN., TAX-GEN. §§ 7.5-201(a); 7.5-301(a).
5 MD. CODE ANN., TAX-GEN. § 7.5-101(e)(1).
6 MD. CODE ANN., TAX-GEN. § 7.5-103.
7 MD. CODE ANN., TAX-GEN. § 7.5-102(b)(1).
8 Ch. 669 (S.B. 787), Laws 2021.
9 MD. CODE ANN., TAX-GEN. § 7.5-101(e)(2).
10 MD. CODE ANN., TAX-GEN. § 7.5-102(c).
11 MD. CODE ANN., TAX-GEN. § 7.5-102(b)(2).
16 MD. REGS. CODE § The Comptroller slightly changed the language from the proposed regulation stating that a taxpayer look to “the terms of the underlying contract for digital advertising services” to the “nontechnical information included in the contract” language contained in the final regulation.
18 MD. REGS. CODE § The Comptroller added “industry standard metrics” as an additional piece of technical information that taxpayers can utilize in determining a device’s location. The regulations do not define “industry standard metrics.”
19 MD. REGS. CODE § The regulations also address computation of the tax in the year of a rate change, tax returns and declarations, and estimated taxes. See MD. REGS. CODE §§–
21 Id.
22 MD. CODE ANN., TAX-GEN. §§ 7.5-101(c); 7.5-102(b)(1).
23 See MD. CODE ANN., TAX-GEN. § 7.5-103.
24 Four business associations filed a lawsuit against the Maryland Comptroller in Maryland federal court seeking a declaration and injunction against enforcement of the tax. U.S. Chamber of Commerce. v. Franchot, U.S. District Court for the District of Maryland, Northern Division, No. 1:21-cv-00410, filed Feb. 18, 2021. Subsequently, Comcast and Verizon filed a complaint in state court seeking a declaration that the digital advertising tax is illegal under the ITFA, also claiming Due Process and Commerce Clause violations. Comcast of California/Maryland/Pennsylvania/ Virginia/West Virginia LLC. v. Maryland Comptroller of the Treasury, Circuit Court for Anne Arundel County, Md., No. C-02-CV-21-000509, filed Apr. 15, 2021.






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