The Ongoing Controversy of Maryland’s Digital Advertising Tax
On February 12, 2021, Maryland became the first state to create a digital advertising tax. The Digital Advertising Gross Revenues Tax (DAGRT) was originally passed in March 2020 but subsequently vetoed by Maryland Gov. Larry Hogan. Notwithstanding, the Maryland Legislature voted to override the governor’s veto.
DAGRT is essentially a gross receipts tax on the digital advertising revenue earned by major tech companies. DAGRT imposes a progressive tax on the sale of digital advertising service providers’ gross revenue within Maryland. The tax affects entities with revenue exceeding $100 million. The rate of the tax imposed, based on global revenue, is 2.5 percent for annual global gross receipts of $100 million to $1 billion, 5 percent for gross receipts of $1 billion to $5 billion, 7.5 percent for gross receipts of $5 billion to $15 billion, and 10 percent for gross receipts exceeding $15 billion.
DAGRT broadly defines “digital advertising services” as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” It should be noted this list is nonexclusive and may create a vague scope of the types of digital advertising that would be included.
Serious concerns already have been raised regarding the constitutionality of DAGRT as well as its compliance with federal law, such as the Internet Tax Freedom Act. In fact, one week after the Legislature overrode the governor’s veto, lobbying groups filed a federal lawsuit challenging DAGRT on several grounds in Chamber of Com. v. Franchot, Civ. No. 21-cv-410 (N.D. Md. filed February 18, 2021).
Taxpayers with digital advertising revenue should carefully evaluate the applicability and effect of Maryland’s DAGRT. Similar bills have been proposed in New York (AB 10706), Connecticut (HB 6187), and Indiana (HB 1312).
For additional guidance on DAGRT, contact your BKD Trusted Advisor™ or submit the Contact Us form below.