May 7, 2020 Maryland Governor vetoes new taxes on digital advertising and digital goods, override uncertain On May 7, 2020, Maryland Governor Larry Hogan vetoed two bills (HB 732 and HB 932) that would have imposed a new tax on digital advertising and extended the state's existing sales and use tax to digital goods, respectively. Legislative proponents suggested that both bills were passed as a means of funding recommended changes to the state's education system and were expected to cost more than $4 billion over the next 10 years. With the Maryland legislature currently out of session, and no Special Sessions currently scheduled, the earliest that a veto override vote may be considered would be in January 2021, barring a Special Session being called before that date. HB 732, which was passed on March 18, 2020, would have imposed a graduated tax on the annual gross revenue derived from digital advertising in the state, based on global annual revenues, as follows:
HB 732 defined "annual gross revenues" to mean income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. Persons with annual gross revenues derived from digital advertising services within Maryland of at least $1 million would have been required to file a return with the Office of the Maryland Comptroller of Treasury on or before April 15 of the next year; persons that reasonably expected their annual gross revenues derived from digital advertising services in the state to exceed that amount would have been required to 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 had to maintain records of the digital advertising services they provided in the state to substantiate the basis for their apportionment and calculation of the tax owed on digital advertising gross revenues. Failure to comply with provisions of this new tax would have resulted in criminal penalties, including fines and imprisonment. HB 932, which was passed on the same day, would have applied 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. The bill, which was not expected to be vetoed, would have aligned Maryland sales tax law with the more than 30 state-level jurisdictions that also impose their sales and use tax on such goods. Implications Under Maryland's Constitution, a three-fifths (60%) vote of both chambers of the state's legislature would be required to override the Governor's veto. If the Governor vetoes a bill during a regular session, the General Assembly will immediately consider the Governor's veto message. Alternatively, if the Governor vetoes a bill presented after the session has concluded, the veto message must be considered immediately at the next regular or special session of the legislature. The General Assembly may not override a veto during a new legislative term, because the bill would have been passed by the previous legislature.1 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. Legal issues had been raised with respect to the digital services tax in HB 732, 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 Governor Hogan's veto is overridden and HB 732 does ultimately become law, legal challenges can be expected to delay or invalidate the measure. The tax also had 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 European Union, 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. Even if the Legislature does not override Governor Hogan's vetoes, the bills are expected to be reintroduced in the next legislative session, scheduled to begin January 13, 2021. ———————————————
——————————————— 1 Maryland Const., Art. II, sec. 17. | |||||||||
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