Digital Advertising Taxes: Implementation, Legal and Administrative Challenges

Issue July/August 2021 August 2021 By Wilton B. Hyman
Taxation Law Section Review
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Wilton B. Hyman

I. Introduction

The Maryland General Assembly enacted this country’s first digital advertisement gross revenue tax, which took effect on March 14, 2021.1 Several other states, including Massachusetts, are also considering this type of tax.2 This article will explain the provisions in the Maryland legislation, discuss the statutory distinctions between the Maryland law and proposed digital advertisement tax bills being considered in Massachusetts, and then list some of the legal challenges that will need to be addressed before these new taxes take effect.

Professor Paul Romer, a Nobel Prize-winning economist at New York University, has advocated for a digital ad tax on companies like Facebook and Google as a means of prompting those companies to change their business model, which relies on harvesting user data in order to sell digital ads that target potential consumers.3 Romer argues that those firms’ business model contributes to "dangerous misinformation and hate speech that has undermined trust in democratic institutions."4 The tax is intended to "encourage platform companies to shift toward a healthier, more traditional [business] model," and will circumvent the challenges posed by trying to regulate those companies through antitrust law or by administrative or legislative efforts.5 Romer states that a surcharge could be added to the federal corporate income tax and that states could impose a tax on digital ad revenue generated from ads shown to their residents.6 Romer acknowledges that "Ad-driven platform companies could avoid this tax entirely by switching to the business model that many digital companies already offer: an ad-free subscription. Under this model, consumers know what they give up, and the success of the business would not hinge on tracking customers with ever more sophisticated surveillance techniques. A company could succeed the old-fashioned way: by delivering a service that is worth more than it costs."7

The progressive tax rate structure that digital ad taxes impose is intended to punish firms that persist in using an ad-driven model, rather than changing to a subscription model.8 Romer acknowledges that companies that are more profitable using targeted digital ads rather than a subscription-based service, even after paying the digital ad tax, will continue with their current model.9 The progressive tax rate will "limit the size of those businesses" and discourage potential mergers, which would increase the likelihood of higher digital ad tax rates on the combined firms’ income.10 The progressive rate structure also reflects the fact that "dominant social media platforms bear the brunt of the tax," excluding small and startup firms from the digital ad tax, and encouraging competition.11

II. The Maryland Digital Advertising Gross Revenues Tax

A. Who is subject to it?

The tax applies to "persons," which includes individuals, receivers, trustees, guardians, personal representatives, fiduciaries, any type of representative, partnerships, firms, associations, corporations or any type of entity.12 The tax is inapplicable to governmental entities, units or governmental instrumentalities.13 The state comptroller is charged with administering the tax.14

B. How is it administered?

On a quarterly basis, the comptroller is required to transfer to an administrative cost account the costs incurred in administering the digital advertising tax in the previous quarter, taken from the revenue collected under the digital ad services tax.15 Any revenue remaining, after the transfer to the administrative account, will be distributed to the "Blueprint for Maryland’s Future Fund."16 The fund’s purpose is to provide "adequate funding for early childhood education and primary and secondary education…"17

The digital advertisement tax is "imposed on annual gross revenues of a person derived from digital advertising services" provided in the state of Maryland.18 "Annual gross revenues" include "income or revenue from all sources, before any expenses or taxes computed according to generally accepted accounting principles."19

"Digital advertising services" include banner ads, search engine ads, interstitial ads and similar types of ad services, accessible to digital device users through a website, software or a computer application.20

The tax is imposed on annual gross revenues derived from digital ad services provided within the state, or the "assessable base," which is determined by multiplying the annual gross revenues by a fraction in which the numerator is the annual gross revenues "derived from" digital ad services provided in Maryland, and the denominator is the annual gross revenue derived from digital ad services within the United States.21 The state comptroller will adopt regulations allowing for the determination of "the State from which digital advertising services are derived."22

The tax rate that is applied to the "annual gross revenues derived from digital advertising services in the state" varies, depending on the person’s "global annual gross revenues," with a tax rate of: (1) 2.5% if global annual gross revenues are between $100,000,000 and $1,000,000,000; (2) 5% if global annual gross revenues are between $1,000,000,001 and $5,000,000,000; (3) 7.5% if global annual gross revenues are between $5,000,000,001 and $15,000,000,000; and (4) 10% if global annual gross revenues exceed $15,000,000,000.23

Persons with $1,000,000 or more in annual gross revenue derived from digital ad services within Maryland must file a return by April 15 with the state comptroller.24 Persons who reasonably anticipate deriving more than $1,000,000 in annual gross revenue from digital ad services within Maryland must file estimated tax returns, along with estimated quarterly tax payments.25

All persons required to file returns must include an attachment that includes "any information that the Comptroller requires to determine annual gross revenues derived from digital advertising services in the state,"26 and they must maintain records that document the digital ad services provided in Maryland and the means by which the digital ad gross revenue tax was calculated.27 Each person must pay the digital ad gross revenue tax that is due when their return is filed.28

III. Massachusetts bills concerning a Digital Advertising Tax

Massachusetts lawmakers have introduced two bills that would establish a digital advertising tax29 and one bill that would create a special commission to "conduct a comprehensive study relative to generating revenue from digital advertising that is displayed inside of Massachusetts by companies that generate over $100 million a year in global revenue."30

A. House Bill No. 3081

House Bill No. 3081 is substantially similar to the Maryland digital ad tax legislation, imposing a tax on "annual gross revenues of a person derived from digital advertising services in the commonwealth." However, the bill does not provide an apportionment formula for determining the annual gross revenues derived within Massachusetts.

The Massachusetts tax is 5% of the "assessable base" for persons with annual gross revenues of $50 million to $100 million; 10% of the assessable base if annual gross revenues are over $100 million but not in excess of $200 million; and 15% of the assessable base if annual gross revenues exceed $200 million. The "assessable base" is defined as "annual revenues derived from digital advertising services in the commonwealth."31

Massachusetts requires persons whose annual gross revenues from digital advertising services in the commonwealth are $100,000 or more to file a return with the commissioner, whereas in Maryland, the tax filing threshold is $1 million.

House Bill No. 3081 relies upon the user’s Internet Protocol address, or whether the user "is known or reasonably presumed to be using the device in the commonwealth," to determine whether digital ads are provided within Massachusetts.

House Bill No. 3081 provides that the tax would apply to the tax year beginning on Jan. 1, 2022.

B. House Bill No. 2894

House Bill No. 2894 imposes "an excise on the sale of digital advertising services within the commonwealth on persons with revenue from digital advertising services in excess of $25 million per year within the commonwealth." The tax imposed would be "5 per cent of the person’s annual revenue from digital advertising services within the commonwealth." Under this bill, $3 million of the tax revenue would be provided annually to fund a "Local Newspaper Trust Fund," to support small newspapers located in the commonwealth; 50% of the annual revenue would fund the "Pre-K and After School Trust Fund," which provides funds for kindergarten, early childhood and child care programs; and the remaining funds would be deposited in the General Fund.

C. House Bill No. 2928

House Bill No. 2928 creates a special commission that would conduct a study and report on the commonwealth raising revenue from companies "that generate over $100 million a year in global revenue." The final report would be due by Feb. 15, 2022, and would address a non-exclusive list of issues concerning current tax revenue already collected from companies affected by the proposed tax, best practices from other states, recommendations concerning the rate of taxation imposed on affected companies, and suggested uses of the revenues, such as expanded broadband access to underserved areas, improving internet, computer technology and remote learning resources for public schools, and municipal and commonwealth cybersecurity programs.

IV. Potential Challenges to State Digital Advertising Gross Revenue Taxes

One potential issue that these new taxes raise is whether the legislative objective of raising revenue is sustainable if, based on Romer’s argument, the purpose of the tax is intended to change the business model of digital ad-based firms, and those same firms are able to circumvent the digital ad tax by merely changing their business model to "an ad-free subscription" business model.32 In other words, does the legislative objective of raising revenue actually line up with the intended purpose of the digital ad tax?

In addition, two lawsuits have already been filed challenging the Maryland digital advertising services tax, one in U.S. District Court in Maryland by the U.S. Chamber of Commerce that alleges violations of the Internet Tax Freedom Act (IFTA), the Due Process Clause and the Commerce Clause;33 and a lawsuit filed in Maryland state court by Comcast and Verizon, alleging violations of the ITFA, the Due Process and Commerce clauses, and provisions of the Maryland State Constitution.34

Some concerns regarding the Maryland legislation include:

1. The punitive nature of the tax, due to the fact that the tax rate increases based on the amount of "global" revenues the entity generates from digital advertising taking place outside of the state of Maryland;35

2.  The vagueness of the statutory language, and the difficulty taxpayers would have in complying with the statutory provisions, which places a greater burden on the administrative agencies to provide rules and regulations to clearly define the statutory provisions and their requirements;36

3.  The fairness, or lack thereof, of imposing a tax upon gross revenues, rather than net revenues;37

4.  The difficulty in ascertaining where a digital device user is located when they view a digital advertisement;38

5.  The tax would disproportionately burden out-of-state firms, which have higher global annual gross revenues than Maryland-based firms;39

6.  The tax violates the IFTA, 47 USC § 151 note, which prohibits states from imposing "multiple or discriminatory taxes on electronic commerce," by imposing a tax on digital advertising services, but not on non-digital advertising, such as ads available through newspapers, radio or television.40

V. Conclusion

Digital advertising gross revenue taxes represent an old way of regulating old lines of business, advertising and retail that are conducted in a new form, through online commerce, which is extremely profitable, but which also poses challenges to democracy due to their role in fomenting online misinformation and hate speech. This tax will also impact the most powerful companies in the world, which include Facebook, Microsoft, Amazon and Google.41 One issue that these taxes raise is whether the states that are considering them view the tax as a dedicated and sustainable source of tax revenue to support vital government services, or whether it is a means of altering the business model of very powerful and profitable companies that pose a challenge to national cohesion.

In regard to the court challenges to the Maryland digital advertising act, whether they succeed or not, it will be interesting to see how this area of law develops to either circumvent adverse rulings, or whether the nature of state regulatory activity, through taxation, is modified to avoid judicial, legislative or regulatory roadblocks.

Wilton B. Hyman is a professor of law at New England Law | Boston. Hyman is also the vice chair of the Massachusetts Bar Association’s Taxation Law Section Council.

H.B. 732 was approved by the Maryland General Assembly and took effect on March 14, 2021, after a legislative override of Governor Larry Hogan’s veto of the bill. The tax was originally intended to apply to tax years beginning after Dec. 31, 2020, but was postponed for one year by S.B. 787, subsequent legislation that passed the General Assembly, which was not signed by the governor, but took effect automatically on May 30, 2021. Jason R. Brown, "The Maryland Digital Advertising Services Tax and the Expanding Map for Digital Taxes," ABA Tax Times, Vol. 40 No. 3, Spring 2021, June 11, 2021.

In addition to Massachusetts, Texas, New York and West Virginia are also considering digital advertising taxes. Id.

Paul Romer, "A Tax That Could Fix Big Tech," N.Y. Times, May 6, 2019, at

4 Id.

5 Id.

6 Id.

7 Id.

8 Id.


10 Id.

11 Id.

12 MD. Code Ann. § 1-101(p)(1).

13 MD. Code Ann. § 1-101(p)(2). The tax does not apply to digital ads that are provided by broadcast entities and news media entities. Broadcast entities are entities "primarily engaged in the business of operating a broadcast television or radio station," and news media entities are entities "primarily in the business of newsgathering, reporting, or publishing articles or commentary about news, current events, culture or other matters of public interest." Jason R. Brown, "The Maryland Digital Advertising Services Tax and the Expanding Map for Digital Taxes," ABA Tax Times, Vol. 40 No. 3, Spring 2021, June 11, 2021.

14 MD. Code Ann. § 2-102(4).

15 MD. Code Ann. § 2-4A-02.

16 MD. Code Ann. § 2-4A-02.

17 MD. Code Ann. § 5-219(c).

18 MD. Code Ann. § 7.5-102(A).

19 MD. Code Ann. § 7.5-101(B).

20 MD. Code Ann. § 7.5-101(D)-(F).

21 MD. Code Ann. § 7.5-102(B)(1).

22 MD. Code Ann. § 7.5-102(B)(2).

23 MD. Code Ann. § 7.5-103(1)-(4).

24 MD. Code Ann. § 7.5-201(A).

25 MD. Code Ann. § 7.5-201(B)(1)-(2); 7.5-301(B).

26 MD. Code Ann. §. 7.5-201(C).

27 MD. Code Ann. §. 7.5-202.

28 MD. Code Ann. § 7.5-301(A).

29 House Bill No. 3081, introduced by Erika Uyterhoeven and Adam G. Hinds, Feb. 18, 2021; and House Bill No. 2894, introduced by Dylan A. Fernandes, Feb. 19, 2021.

30 House Bill No. 2928, introduced by Richard M. Haggerty and Natalie M. Blais, Feb. 19, 2021.

31 Section 2 of House Bill 3081 provides that the tax is imposed on "annual gross revenues" from digital advertising services in the commonwealth, while Section 3 provides that the digital advertising gross revenues tax rate is 5, 10 or 15% of the assessable base, which is defined as "annual revenues" from digital services in the commonwealth.

32 Paul Romer, "A Tax That Could Fix Big Tech," N.Y. Times, May 6, 2019, at

33 Chamber of Commerce of the United States of America, et. al v. Franchot, Civ. No. 21-cv-410 (USDC for the District of Maryland, Northern Division).

34 Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC, et al v. Comptroller of the Treasury of Maryland, C-02-CV-21-000509.

35 See Chamber of Commerce, infra note 33.

36 Jason R. Brown, "The Maryland Digital Advertising Services Tax and the Expanding Map for Digital Taxes," ABA Tax Times, Vol. 40 No. 3, Spring 2021, June 11, 2021.

37 See Chamber of Commerce, infra note 33.

38 Id.

39 Id.

40 Id. See Comcast, et al, infra note 34.

41 Liz Farmer, "Maryland to delay controversial digital advertising tax as the lawsuits keep coming,", April 17, 2021,