The State of Maryland has past the first ever tax on digital advertising revenue which will affect major companies like Google, Facebook, YouTube and many more. State legislators cited the economic crisis caused by Covid-19, which has harmed small businesses and reduced state revenues, as a reason for the tax. It was passed on Friday, overriding a veto made by Maryland Governor Larry Hogan.
The tax will be assessed at different rates based on a company’s total revenue: 2.5% for companies bringing in $100 million a year and up to 10% for companies making more than $15 billion. According to the estimates, Maryland can expect to bring in $250 million in additional revenue from the tax in its first year.
As the United States is divided into fifty different sovereign entities, each one has its own authority to enact regulations and taxes within its borders. Since the break out of Internet commerce in the late 1990s, much has been made as to how businesses can offer lower prices to out of state customers by selling through the internet since states do not have authority over out of state commerce. This puts local so called “brick and mortar” businesses at a disadvantage as they must add local sales taxes to their sale prices.
As for advertising, the traditional print media have been at a similar disadvantage when it comes to raising revenue. It must charge whatever local taxes may be required for the ads that appear in a publication’s pages. And there are also state taxes collected on the local businesses, which also vary from state to state.
Maryland State Senator Bill Ferguson explained in a statement, which he posted on Facebook, that online companies have seen their advantage increase during the Coronavirus pandemic. “Companies like Amazon, Facebook, and Google have seen their profits drastically increase during the COVID-19 pandemic while our Main Street businesses are struggling to keep up,” he wrote.
He went on the explain that the new tax will help make up for lost state revenue caused by the Covid shutdowns and level the playing field for local smaller businesses which must pay all local taxes. “This targeted tax on companies that make over $100,000,000 a year ONLY from digital advertising is a vital mechanism to make sure big tech pays taxes in Maryland, just like our small businesses,” added Ferguson.
“At a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and businesses can foot the bill, or big tech can start paying their fair share.”
There will now, of course, be constitutional issues raised by the major companies in an attempt to have this new tax overturned by the courts. They can be certain to argue that only the Federal government has the authority to issue such a tax. They will also likely make the case that this tax will hurt local businesses which rely on bringing in customers through their online advertisements.
The Internet Association, a lobbying group which represents all of the major tech players like Microsoft, Apple, Google and Amazon, has already fired the first shot against the State of Maryland on behalf of its members.
Calling the vote a “Shame,” it released a statement saying,” Maryland now has the dubious honor of being the only state in the country to have ever passed such a flawed tax, and the added distinction of doing so in the middle of a pandemic and economic crisis.”
Acknowledging a coming court battle it also said, “At least Maryland businesses and consumers can rest easier knowing that the courts will have the last say on this matter, and that the law, not politics, will decide the outcome.”