26 March 2020 Maryland legislature approves new taxes on digital advertising and digital goods, Governor's signature uncertain On March 18, 2020, the Maryland legislature approved two bills (HB 732 and HB 932), which would impose a new tax on digital advertising and extend the state's existing sales and use tax to digital goods. The bills were sent to Governor Hogan, who is expected to veto the proposed digital advertising tax (HB 732). Effective for tax year 2021, HB 732 would impose a tax on the annual gross revenue derived from digital advertising in the state. The tax would apply a graduated rate, based on global annual revenues, as follows:
HB 732 defines "annual gross revenues" to mean income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. Any person with annual gross revenues derived from digital advertising services within Maryland of at least $1 million would be required to file a return with the Office of the Maryland Comptroller of Treasury on or before April 15 of the next year, and each person that reasonably expects their annual gross revenues derived from digital advertising services in the state to exceed that amount must file a declaration of estimated tax on or before April 15 of that year and pay quarterly estimated taxes. Persons subject to the tax would have to maintain records of the digital advertising services they provide in the state to substantiate the basis for their apportionment and calculation of the digital advertising gross revenues tax owed. Failure to comply with provisions of this new tax could result in criminal penalties, including fines and imprisonment. HB 932 would apply Maryland's existing 6% sales and use tax to digital products, including digital code, streaming, music, ring tones, e-books and audio books, movies, online newspapers, and cable, satellite and pay-per-view television programming. If enacted, HB932 would align Maryland sales tax law with the more than 30 state-level jurisdictions that also impose their sales and use tax on such goods. Both bills were passed as a means of funding recommended changes to the state's education system and are expected to cost more than $4 billion over the next 10 years. While the expanded sales tax on digital goods ultimately is expected to become law, Governor Hogan is expected to veto the new tax on digital advertising services set forth in HB 732. Under Maryland's Constitution, a three-fifths (60%) vote of both chambers of the state's legislature would be required to override a veto. HB 732 passed by votes of 88-47 in the House and 29-16 in the Senate, just above the necessary 60% mark in each chamber. A number of legal issues with HB 732 have been raised with respect to the digital services tax, such as potential violations of the First Amendment and the Commerce Clause of the U.S. Constitution and potential pre-emption by the federal Internet Tax Freedom Act. Thus, even if HB 732 does become law, legal challenges are expected to delay or invalidate the proposed new tax. The tax also has been criticized as effectuating bad policy by potentially double-taxing entities that provide or purchase digital advertising services in Maryland, as they already are paying tax on their in-state earnings. Nevertheless, it should be noted that a handful of other states, most notably New York, and nations within the EU, have proposed similar sales/consumption-based taxes on such services in recent months, so taxpayers may expect additional activity at the state, local and international levels on the taxation of digital advertising.
Document ID: 2020-0713 | |||||||||
