Maryland Ad Tax Threat Continues to Grow

Today, ANA will be testifying before the Maryland Senate Committee on Budget and Taxation in strong opposition to SB 2, a highly misguided and harmful tax proposal. SB 2, if enacted, would make Maryland the first state or locality in the United States to impose a targeted punitive tax on gross revenues derived from digital advertising services.

This tax, for no discernible reason, would target digital advertising. The tax could rise to as high as 10% for specified digital advertising in the state. This type of punitive discriminatory tax is prohibited by the Permanent Internet Tax Freedom Act (PITFA). To trigger coverage under this legislation, SB 2 creates arbitrary global annual gross revenue thresholds that have nothing to do with business activity in Maryland. This approach would be constitutionally suspect under the Commerce Clause of the U.S. Constitution and raises serious First Amendment concerns for singling out digital commercial speech for a punitive tax.

This tax would also create a regulatory enforcement nightmare. The bill is highly dependent on determining digital advertising activity based primarily on IP addresses. IP addresses are often highly unreliable in determining a physical location where a particular digital message is delivered. Therefore, the tax would almost certainly be seriously over and under inclusive. The legislation allows Maryland tax authorities to impose this tax based on a reasonable suspicion of digital tax activity. However, taxing individuals or companies based on guesses about projected taxable activity is certainly highly legally suspect and clearly unfair.

Furthermore, advertising is a major driver of economic activity. An economic analysis based on a model developed by Nobel Laurate in economics Lawrence Klein determined that advertising’s impact in Maryland is dramatically high:

• Advertising expenditures account for $101.5 billion of economic output or sales in Maryland – that is 14.6 percent of the $693.1 billion in total economic output in the state.
• Sales of products and services that are driven by advertising help support 393,667 jobs, representing 14.9 percent of the 2.6 million jobs in Maryland.
• Advertising drives the creation of jobs through the State of Maryland. Every one million dollars spent on advertising in Maryland supports 82 jobs across industries throughout the State. Every direct advertising job also supports 33 other jobs across all industries.

Clearly placing heavy burdens on the effort to sell is counterproductive, particularly in states dependent on a sales tax. Therefore, taxing advertising is extremely detrimental and has been rejected by over 40 states that have considered this issue. We understand the need in Maryland to seek funding and support for educational purposes, but this proposal will cause substantially more harm than good. We will strongly urge Maryland state legislators to carefully reconsider and then withdraw this potentially highly damaging proposal.