In February of this year, Maryland became the first state to pass a digital advertising tax into law. Known as the Digital Advertising Gross Revenues Tax, Maryland’s new law imposes a sliding-tax on the annual gross revenues of large companies derived from “digital advertising services” in the state.2 “Digital advertising services” is defined under the law as any “advertisement services on a digital interface, including advertisements in the form of banner, search engine, interstitial, and other comparable advertising services." 3
New York now joins Maryland, Washington, Oregon, and Connecticut, as states that are currently considering (or have passed, in the case of Maryland) new data or digital advertising tax laws in 2021. Specifically, New York’s legislature has taken up Bill S1124, titled the Digital Ad Tax Act (DATA), which would: (i) establish a tiered tax (of 2.5% to 10%) on the annual gross revenues derived from “digital advertising services” in the state for any person with global annual gross revenues of $100 million dollars or more; and, (ii) require each person that has annual gross revenues derived from “digital advertising services” in the state of at least $1 million to file a sworn return.4 S1124 actually revives an earlier bill version introduced in March 2020, and is modeled after Maryland’s Digital Advertising Gross Revenues Tax. A key distinction between the New York and Maryland digital ad tax laws, however, is that, under the proposed DATA, the term “digital advertising services” is expressly limited to those advertisement services that use personal information about the people to whom the ads are directed.
These proposed data and digital advertising tax laws face significant administrative and legal hurdles. For one thing, identifying the situs of a company’s digital advertising services and/or sales of personal data for taxation purposes can be virtually impossible. Moreover, as currently being litigated in Chamber of Commerce of the U.S.A. v. Franchot, 5 -- an action challenging Maryland’s Digital Advertising Gross Revenues Tax, these proposed data taxes may violate various federal laws, including the Internet Tax Freedom Act, the Due Process Clause, Commerce Clause, and dormant Commerce Clause of the U.S. Constitution. New York and the other states have so far sought to address the sourcing and federal law issues through the inclusion of certain registration and self-reporting requirements, and certain exceptions and carve-out language. Time and Franchot will tell if those workarounds are enough.
2 Md. Code Ann., Tax-Gen, § 7.5-103 (West through 2021 Regular Session of the General Assembly).
4 N.Y. Legis. S. S1124. Reg. Sess. 2021-2022 (2021).
5 No. 1:21-cv-00410 (D. Md. Feb. 18, 2021)