Maryland’s First-In-Nation Digital Ad Tax Could Catch On — IfIt’s Legal

Google GOOG +1.4%, Facebook and Microsoft could start paying hefty advertising fees in Maryland — and possibly elsewhere — if the state’s new digital ad tax holds up in court.

Lawmakers in other states including Connecticut, Indiana, Montana, Nebraska and New York are reportedly eyeing similar bills but are waiting first to see if Maryland’s law withstands its legal challenge. 

Maryland's state legislature made history last month when it overrode a veto from the governor to pass the nation’s first tax on digital advertising revenues. Not surprisingly, it took less than a week for the U.S. Chamber of Commerce and a collection of trade groups representing tech giants in the online advertising space to file suit in federal court.

The lawsuit alleges the tax is discriminatory and violates the Internet Tax Freedom Act, which, among other things, bans states and localities from taxing internet access. Some experts agree.

David Brunori, a public policy professor at the George Washington University, noted that the Internet Tax Freedom Act (IFTA) also prohibits states from imposing taxes on digital goods when they do nottax the non-digital equivalent. (Maryland doesn’t currently tax non-digital advertising.) Brunori also notes there’s “a strong argument that the tax violates the Commerce Clause of the U.S. Constitution” for discriminating against out-of-state businesses.

“As importantly, the tax is bad policy,” he adds. “It is a gross receipts tax. It will be passed on to customers -- mostly small businesses in Maryland -- in the form of higher prices. It is a very cynical way to raise revenue.”

Maryland estimates the digital tax could raise as much as $250 million in its first full year by taxing annual gross revenues derived from types of digital advertising services in the state. The tax rate is progressive, beginning at 2.5% for companies with global annual gross revenues of $100 million to $1 billion and goes up to a rate of 10% for companies with global annual gross revenues exceeding $15 billion.

The revenue would go toward education funding in the state.