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Maryland enacts digital ad gross revenues tax

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The Maryland legislature recently voted to override the veto of two tax bills, H.B. 732 and H.B. 932, which were vetoed by Gov. Larry Hogan in May 2020.1 By enacting H.B. 732, Maryland is poised to become the first state to impose a gross receipts tax on proceeds from digital advertising services. The tax would be imposed on entities with global gross revenue of at least $100 million. Entities that have annual gross revenues derived from digital advertising services in Maryland of at least $1 million in a calendar year would be required file a tax return. The rate of the tax would range from 2.5% to 10% based on the amount of the entity’s annual global gross revenue. H.B. 932 expands sales and use taxes to include certain digital products.

Digital advertising gross revenues tax Effective March 14, 2021, and applicable to taxable years beginning after Dec. 31, 2020,2 H.B. 732 imposes a tax on the annual gross revenues of a person derived from digital advertising services in Maryland.3 Under the statute, “digital advertising services” means advertisement services on a digital interface, including banner, search engine, and interstitial advertising, and other comparable advertising services.4 The annual gross revenues of a person derived from digital advertising services in Maryland is determined via an apportionment ratio of Maryland to U.S. gross revenues derived from digital advertising services.5

Tax rates The rate of the digital advertising tax varies according to the taxpayer’s global annual gross revenues:

  • 2.5% of the assessable base for a person with global annual gross revenues of $100 million through $1 billion;
  • 5% of the assessable base for a person with global annual gross revenues of over $1 billion through $5 billion;
  • 7.5% of the assessable base for a person with global annual gross revenues of over $5 billion through $15 billion; and
  • 10% of the assessable base for a person with global annual gross revenues over $15 billion.6

Returns and payment Every person with annual gross revenues derived from digital advertising services in Maryland (i.e. an assessable base) of at least $1 million in a calendar year must file a tax return and submit payment by April 15 following the end of the calendar year.7 Each person who reasonably expects to have annual gross revenues derived from digital advertising services in Maryland that exceed $1 million must file a declaration of estimated tax by April 15 and file quarterly estimated tax returns by June 15, Sept. 15 and Dec. 15 of that year.8 A person required to file estimated returns must pay at least 25% of the estimated tax with the declaration or amended declaration that covers the year and with each quarterly return for that year.9 Any unpaid tax for the year must be paid with the annual return. The legislation amends several general tax statutes governing penalties, interest and the statute of limitations to include the digital advertising gross revenues tax under their purview.10

Taxation of digital products and codes Effective March 14, 2021, H.B. 932 imposes sales and use taxes on digital products and sales tax on digital codes.11 Specifically, “retail sale” is expanded to include: (i) a sale of a digital product sold with rights of permanent, or less than permanent, use to an end user; (ii) a sale of a digital product sold with rights of use conditioned on continued payment by the buyer or subscriber to an end user; and (iii) a sale of subscription to, access to, streaming of, or purchase of a digital code for receiving or accessing digital products to an end user.12 However, “retail sale” does not include a sale of tangible personal property or a digital product if the buyer intends to: (i) resell the tangible personal property or digital product; (ii) use or incorporate the tangible personal property or digital product as part of other tangible personal property or another digital product to be produced for sale; or (iii) transfer the tangible personal property or digital product as part of a taxable service transaction.

The legislation includes definitions to clarify the new tax on digital products and codes. A “digital product” is a product that is obtained electronically by the buyer or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.13 “Digital code” means a code that (i) may be obtained by any means, including in a tangible form, such as a card; or through e-mail; and (ii) provides a buyer with a right to obtain one or more digital products.14 An “end user” is any person other than a person who receives by contract a digital product transferred electronically for further use, in whole or in part, by another person.15

Location of customer tax address The retail sale of a digital code or digital product is presumed to be made in the state in which the customer tax address is located.16 The statute provides a cascading set of six rules to determine the “customer tax address” for the sale of a digital product.17 For a digital product received by a buyer at the vendor’s business location, the sale occurs at that business location. If this does not apply, the sale occurs at the primary use location if known by the vendor.18 The third rule provides that the sale occurs at the location where the digital product is received by the buyer if known to the vendor. If none of these rules applies, the sale occurs at the buyer’s address available from the vendor’s business records. The fifth rule provides the sale occurs at the buyer’s address obtained during the consummation of the sale, including the address of the buyer’s payment instrument. Finally, if none of these rules applies, the sale occurs at one of the following U.S. locations, as selected and consistently used by the vendor: (i) the vendor’s headquarters; (ii) the location where the vendor has the greatest number of employees; or (iii) the location from which the vendor makes digital products available for electronic transfer.

Use tax provisions For purposes of the Maryland use tax, digital products are incorporated into the definition of “use,” and are generally subject to the use tax (and many of its exclusions) in the same manner as tangible personal property and taxable services.19 However, for purposes of digital products, additional exceptions to the definition of “use” have been added. These exceptions include an exercise of a right or power over a digital code to receive or access a digital product, an exercise of a right or power over a digital product acquired by a sale if the buyer is not an end user, and the sale or transfer of a digital product or digital code by the transferor and obtained by the end user free of charge.

Commentary Many observers have closely followed H.B. 732 since it was passed by the Maryland legislature in March 2020. The legislation is controversial and whether the state begins to impose the digital advertising gross revenues tax in the near future remains very uncertain. In vetoing H.B. 732 and H.B. 932 in May 2020, Gov. Hogan called these taxes “misguided” and the tax increase “unconscionable in the current environment.”20 Even prior to the COVID-19 pandemic, however, many commentators noted that digital advertising service taxes in particular are a poor policy choice, against the international trend, and could be subject to legal challenge.21

As expected, the first legal challenge came swiftly in response to the Maryland legislature’s override. Four business associations commenced litigation last week against the Maryland Comptroller in a federal district court seeking a declaration and injunction against enforcement of the digital advertising gross revenues tax on sellers.22 The litigants are arguing that the tax violates the permanent Internet Tax Freedom Act, as well as the Commerce and Due Process Clauses of the U.S. Constitution.

Beyond the legal challenges, there are additional practical obstacles regarding the implementation of the digital advertising gross revenues tax. While the tax is currently effective March 14, 2021, the Comptroller has not yet released any guidance concerning the tax or the necessary forms (including tax returns). The first estimated tax declaration presumably is due April 15, but the Comptroller could be compelled to delay implementation of the new tax. The statutes enacting the tax are not very detailed and there are many unanswered questions concerning who is subject to the tax and how the Comptroller intends to administer and enforce the tax.23 While it might be instructive for the Comptroller to look at existing market-based sourcing provisions utilized for purposes of the state’s corporation income tax, even these provisions are not clear with respect to how digital advertising service revenue should be sourced, beyond an implication that an audience factor is applied.24 Thus, entities are likely to have difficulty in determining whether they are deriving at least $1 million from digital advertising services in Maryland and are thus required to file a return.

The legislature’s fiscal analysis addresses potential compliance issues.25 The tracking of user IP addresses to determine if users are in Maryland when they are viewing an advertisement “could pose problems when a user is near or crossing the State border while receiving an advertisement on a mobile device, or using a virtual private network to alter their location.” Furthermore, “the Comptroller’s Office advises that it may not be able to assess or enforce the tax owed by a foreign company that meets the gross revenue threshold and who has Maryland users but does not pay any taxes in the United States.”26

Given the uncertainty regarding litigation and interpreting the newly adopted law, there is a possibility that the digital advertising gross revenues tax soon may be amended. Legislation recently has been introduced that would amend the definitional statute to provide that “digital advertising services” does not include advertising services or digital interfaces owned or operated by or operated on behalf of a broadcast or news media entity.27 Also, the statute imposing the tax would be amended to provide that a person who derives gross revenues from digital advertising services in Maryland may not directly pass on the cost of the tax to a customer who purchases the digital advertising services by means of a separate fee, surcharge or line-item.

The revenues from the digital advertising gross revenues tax and the sales and use tax on digital products and codes will contribute to the funding of the Blueprint for Maryland’s Future Fund (BMFF), a large initiative to improve Maryland’s educational system.28 The digital advertising gross revenues tax has been predicted to produce as much as $250 million annual revenue, but the fiscal analysis acknowledges that the litigation and compliance issues described above may significantly impact the amount of tax revenue.29 Based on Pennsylvania collections for similar digital products and services, estimated annual revenues from H.B. 932 range from approximately $83 million to $119 million.30 Thus, the revenues from these taxes are important to the state’s planned improvements of its educational system. If the digital advertising gross revenues tax is delayed or not implemented, other sources of funding will need to ensure the fiscal stability of the BMFF.

The enactment of the digital advertising gross revenues tax by Maryland may affect legislative efforts in other states. In addition to Maryland, several states seriously considered taxing digital advertising during 2020, including the District of Columbia,31 New York,32 and Nebraska.33 While none of these proposals were enacted, the push to subject digital goods and services to transactional tax is gaining momentum, in part because states are seeking revenue to address budget shortfalls resulting from the pandemic. Legislation that would tax digital advertising was prefiled prior to New York’s 2021 legislative session.34 Also, legislation that would impose a tax on digital advertising services recently was introduced in Montana.35 Undoubtedly, other states are monitoring whether the Maryland digital advertising gross revenues tax can overcome the legal and compliance challenges it squarely faces.

In light of the global trend of imposing digital service taxes (DSTs), Maryland’s enactment of a digital advertising gross revenues tax also has international ramifications. Technology companies face the challenge of properly complying with DSTs that are being implemented overseas. Presumably, technology companies will want some form of “safe harbor” guidance for Maryland and any other state that enacts a similar tax. Depending on how the Comptroller decides to administer the new tax, some form of tracking device might be the best approach for measuring digital advertising revenue.

The imposition of sales and use taxes on digital products and codes follows a more traveled path, as many states have enacted similar taxes in response to the continuing growth in the digital economy. Also, the Maryland statutes provide detailed definitions to clarify imposition of the tax. Compared to the digital advertising gross revenues tax, the revenue from this tax to be deposited into the BMFF should be more certain.



1 Ch. 37 (H.B. 732) and Ch. 38 (H.B. 932), Laws 2021; vetoed by Maryland Gov. Larry Hogan, May 7, 2020; final vote to override veto of both bills, Feb. 12, 2021. Maryland requires a vote of three-fifths of both the House of Delegates and the Senate to override the governor’s veto.
2 The legislation expressly provides that it takes effect July 1, 2020, and applies to all taxable years beginning after Dec. 31, 2020. H.B. 732, §§ 6, 7. Under the Maryland Constitution, however, any bill enacted over the Governor’s veto takes effect 30 days after the Governor’s veto is overridden, or on the date specified in the bill, whichever is later. MD. CONST. art. II, § 17(d).
3 MD. CODE ANN., TAX-GEN § 7.5-102(a). “Annual gross revenues” means income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. MD. CODE ANN., TAX-GEN § 7.5-101(b).
4 MD. CODE ANN., TAX-GEN § 7.5-101(d). “Digital interface” means any type of software, including a website, part of a website, or application, that a user can access. “User” means an individual or any other person who accesses a digital interface with a device. MD. CODE ANN., TAX-GEN § 7.5-101(e), (f).
5 MD. CODE ANN., TAX-GEN § 7.5-102(b). The Comptroller is directed to adopt regulations that determine the state from which revenues from digital advertising services are derived.
6 MD. CODE ANN., TAX-GEN § 7.5-103. The “assessable base” is the annual gross revenues derived from digital advertising services in Maryland. MD. CODE ANN., TAX-GEN § 7.5-101(c).
7 MD. CODE ANN., TAX-GEN §§ 7.5-201(a); 7.5-301(a). Presumably, this will result in a significant number of zero filings. Entities with at least $1 million of gross revenues from digital advertising services will not be required to pay the tax if their global annual gross revenues are less than $100 million.
8 MD. CODE ANN., TAX-GEN § 7.5-201(b).
9 MD. CODE ANN., TAX-GEN § 7.5-301(b).
10 MD. CODE ANN., TAX-GEN §§ 13-602(a); 13-702(a); 13-1001(g); 13-1002(b), (c); 13-1101(b), (c).
11 The legislation specifically provides an effective date of July 1, 2020. However, a bill enacted over the Governor’s veto takes effect 30 days after the veto is overridden, or on the date specified in the bill, whichever is later.
12 MD. CODE ANN., TAX-GEN § 11-101(h).
13 MD. CODE ANN., TAX-GEN § 11-101(c-4). “Digital product” includes: (i) a work that results from fixation of a series of sounds that are transferred electronically, including (a) prerecorded or live music or performances, readings of books or other written materials, and speeches; and (b) audio greeting cards sent by e-mail; (ii) a digital sound file, such as a ring tone, that is downloaded onto a device and may be used to alert the user of the device with respect to a communication; (iii) a series of related images that, when shown in succession, impart an impression of motion, together with any accompanying sounds that are transferred electronically (including motion pictures, musical videos, news and entertainment programs, live events, video greeting cards sent by e-mail, and video or electronic games); (iv) an “e-book” that is transferred electronically; and (v) a newspaper, magazine, periodical, chat room discussion, weblog, or any other similar product that is transferred electronically.
14 MD. CODE ANN., TAX-GEN § 11-101(c-3). “Digital code” does not include a gift certificate or gift card with a monetary value that may be redeemable for an item other than a digital product.
15 MD. CODE ANN., TAX-GEN § 11-101(c-5).
16 MD. CODE ANN., TAX-GEN § 11-103(c).
17 MD. CODE ANN., TAX-GEN § 11-101(c-1).
18 MD. CODE ANN., TAX-GEN § 11-101(e-1) provides a definition for “primary use location,” and generally references the address of the end user of the digital product.
19 MD. CODE ANN., TAX-GEN § 11-101(n).
20 Letter Vetoing H.B. 732 and H.B. 932, Office of Maryland Gov. Larry Hogan, May 7, 2020.
21 The legislature’s fiscal analysis recognizes the potential legal conflicts cited by opponents of this type of tax. Fiscal and Policy Note for H.B. 732, Department of Legislative Services, Maryland General Assembly, revised April 7, 2020.
22 Chamber of Commerce of the United States of America, Internet Association, NetChoice and Computer & Communications Industry Association v. Franchot, Complaint for Injunctive and Declaratory Relief, U.S. Dist. Ct., Md. N. Div., Civ. No. 21-cv-410, filed Feb. 18, 2021.
23 Michael J. Semes and Jared Walczak, Maryland’s Digital Advertising Tax Is Unworkably Vague, Tax Foundation, Feb. 10, 2021.
24 A regulation provides that “[a]ll revenue, including advertising receipts, derived from print and broadcast media shall be included in the numerator of the sales factor based on a reasonable estimate of the Maryland component of the audience for the broadcaster or publisher.” MD. REGS. CODE § 03.04.03.08.D(6).
25 Fiscal and Policy Note for H.B. 732, Department of Legislative Services, Maryland General Assembly, revised April 7, 2020.
26 Id.
27 H.B. 1200, introduced Feb. 9, 2021; S.B. 787, introduced Feb. 5, 2021.
28 Note that H.B. 732 also amended the taxation of tobacco and vaping products, but the increased tax revenue from these changes is not intended to fund the BMFF.
29 Fiscal and Policy Note for H.B. 732, Department of Legislative Services, Maryland General Assembly, revised April 7, 2020.
30 Fiscal and Policy Note for H.B. 932, Department of Legislative Services, Maryland General Assembly, revised April 6, 2020.
31 The taxation of digital advertising was included in a proposed version of the Fiscal Year 2021 Budget Support Act of 2020, D.C.B. 23-760, but it was removed prior to enactment. For further information, see Aaron Davis, D.C. Council Removes Ad Tax, Tweaks Gas Tax in Final Budget Vote, TAX NOTES TODAY STATE, July 29, 2020.
32 S. 8056, introduced March 13, 2020 (died in committee).
33 L.B. 989, introduced Jan. 14, 2020 (died in committee).
34 S. 302, referred to the New York Senate Budget and Revenue Committee on Jan. 6, 2021. For further discussion, see Carolina Vargas, New York Lawmakers Propose to Tax Digital Ads, Carbon-Based Fuels, TAX NOTES TODAY STATE, Jan. 4, 2021.
35 H.B. 363, introduced Feb. 10, 2021.



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