Maryland changes its tax on gross digital advertising revenues, creating additional constitutional infirmities

On April 12, 2021, Maryland lawmakers passed Senate Bill 787, which proposed several significant changes to Maryland’s digital advertising tax (see Maryland passes tax on gross digital advertising revenue after overturning veto). Governor Larry Hogan has refused to take action regarding signing or opposing Senate Bill 787. As a result, the legislation automatically became law, effective May 12, 2021.

Specifically, Senate Bill 787 defers the effective date of the digital advertising tax to tax years beginning after December 31, 2021 and prohibits taxpayers from “going straight[ing] on the cost of the tax… to a customer who purchases digital advertising services through a separate charge, surcharge or item. “

We believe Maryland’s transmission ban could be subject to several challenges. First, Maryland’s position could be challenged as discriminating against interstate commerce in violation of the Dormant Commerce clause by shifting the burden of the tax to out-of-state customers. Additionally, Maryland’s ban on separately reporting tax on customer invoices could present a constitutional challenge on the basis of the First Amendment. There are other potential constitutional issues with Senate Bill 787, related to the contract clause, equal protection clause, and due process clause. There is also an argument that challenges to the pass-through provision are not prohibited by the Tax Injunction Act, because the prohibition is not about the tax itself, but how the tax is billed and charged.

The legislation also restricts the definition of “digital advertising services” by excluding “advertising services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or a news media entity” .

Senate Bill 787 also amends the State of Maryland Sales and Use Tax to clarify that the recently enacted definition of taxable “digital products” specifically excludes certain online education and training content as well as “professional services[s] obtained electronically or delivered through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic or the like capabilities. Significantly, this exclusion should override the position previously taken by the Maryland Comptroller that the digital product tax applied broadly to sales of software as a service (“SaaS”) and to certain services involving software-as-a-service (“SaaS”). ‘access to online content.

The taxation of online services and SaaS is a national issue, with many states often taking a position, similar to the position previously expressed by the Maryland Comptroller, that these services are taxable as software or digital product. However, to the extent that the true object or primary purpose of a transaction is the sale or receipt of an otherwise non-taxable service, the mere use of software or other digital products to provide that non-taxable service does not should not control taxation, especially when customers do not have the required degree of use or control over any software or digital product to reach the level of a taxable sale or license.

We will continue to keep you updated with SALT Savvy regarding digital tax updates across the country.


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