Digital Ad Tax Debate Continues ― With New Layers

The Maryland State House. Photo by Danielle E. Gaines.

Maryland lawmakers will begin debating afresh this week two of the topics that dominated the last legislative session: a multi-billion-dollar education reform plan, and a $350-million tax bill to fund it.

But there’s a new wrinkle to the continued debate ― an emergency bill filed by Senate President Bill Ferguson (D-Baltimore City) on Friday that he says will prevent tech giants from passing along an estimated $250 million tax on digital advertising to Maryland small businesses.

The potential pass-through of the ad tax to Maryland small businesses has been a chief criticism of business groups and Republican Gov. Lawrence J. Hogan Jr. (R).

“These misguided bills would raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling,” Hogan wrote in a veto letter in May. “With our state in the midst of a global pandemic and economic crash, and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now.”

But Ferguson, who introduced the digital advertising tax last year, says the tax would target the largest tech companies ―those with more than $100 million in annual global revenues ― who store and manipulate users’ personal data.

The digital tax, part of 2020’s House Bill 732, would be the first of its kind in the U.S., and passed along party lines on the frenzied last day of the 2020 General Assembly session.

Other states and the District of Columbia have considered a similar digital tax, but not passed legislation. Similar measures have been implemented in Europe, where internet and social media laws are much different.

Opponents of the Maryland bill said small businesses are likely to feel the full increase of the tax, which is 10% for the biggest online platforms like Facebook and Google.

“This isn’t just a tax on large corporations with smart phone apps and curbside pickup and free 24-hour shipping,” Lt. Gov. Boyd K. Rutherford (R) said at a virtual press conference held last week by Marylanders for Tax Fairness, a new advocacy group. “It’s also a tax on the small, mom-and-pop stores, local Main Street small businesses, and ones who have had to adapt and retool their entire business model due to the pandemic. Or even your next-door neighbor who is creative, who started selling their homemade soaps and jewelry online to make ends meet.”

An emergency fix

Ferguson says it’s not likely that large tech companies would be able to pass through the Maryland tax costs, because it’s not feasible for them to have a different price structure in Maryland alone.

Nevertheless, the new emergency bill he’s sponsoring is a “belt and suspenders” approach to avoid pass-through financial impacts on Maryland businesses.

“At the end of the day, we believe that these multi-billion-dollar, multi-national companies … they should be contributing just like the barber shops, the car mechanics, the retailers on Main Street. This is about a fair-share approach to ensuring that Maryland can sustain its future,” Ferguson said Friday.

The succinct three-page bill, which will be cross-filed in the House of Delegates by Majority Leader Eric G. Luedtke (D-Montgomery) on Monday, would also exempt broadcasters and news media from paying the tax.

The substance of the bill is a single sentence: “A person who derives gross revenues from digital advertising services in the state may not directly pass on the cost of the tax imposed under this section to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.”

A hearing on the bill is scheduled in the Senate for next week.

Douglass V. Mayer, president of Marylanders for Tax Fairness said Friday afternoon that the bill, which was not publicly available online, sounded like an impossible attempt at imposing price controls.

“That’s a fantasy piece of legislation designed to distract from the reality,” Mayer said.

A question of funders

Critics of Marylanders for Tax Fairness have questioned the group’s funding source and motivation.

The organization was registered in Maryland in October. Mayer, a former top aide to Hogan, is registered as a lobbyist to represent the group, identified as a “social welfare organization” with a primary focus on tax issues.

Mayer is also on the three-member board of directors, with Cailey Locklair, president of the Maryland Retailers Association, and Robert Callahan, senior vice president of state government affairs for Internet Association, which represents large global tech firms including Facebook, Twitter and Google.

Callahan testified against the legislation in Annapolis last year.

While the Marylanders for Tax Fairness website boasts support from more than 200 businesses and individuals, it is unclear how the group’s robust advertising effort is being bankrolled.

Mayer, asked if the Internet Association was the primary funder for Marylanders for Tax Fairness, responded simply: “No.”

“We are grateful to have funding from a number of people listed on our website,” he said, before declining to address the issue further.

Supporters listed by Marylanders for Tax Fairness include dozens of Maryland small businesses and chambers of commerce, but also large national trade groups including the Internet Association, American Advertising Federation and the National Taxpayers Union. (The Maryland-Delaware-D.C. Press Association, which Maryland Matters supports as a dues-paying member, is also part of the Marylanders for Tax Fairness coalition.)

Specific financial information about the corporation was not publicly available Friday.

Financial considerations

The full House of Delegates will convene for the first time this legislative session on Monday to take up a lengthy agenda, including dozens of potential veto overrides.

Several tax bills under consideration last session were consolidated late in the session. In addition to the digital advertising tax, House Bill 732 also includes an increase of the state’s tobacco tax, as well as an expansion to electronic smoking devices. The tobacco tax increase could generate as much as $100 million in the first year of implementation, but would be expected to decrease in subsequent years, according to analysts.

If the veto of House Bill 732 is overridden and the digital ad tax becomes law, legal challenges are likely. Critics and business groups have argued that the measure would impose a tax on protected free speech, discriminate against some businesses over others and could run afoul of federal laws including the Internet Tax Freedom Act.

In April, Maryland Attorney General Brian E. Frosh (D) wrote to lawmakers that there is a chance the law could be struck down as unconstitutional, though the individual provisions of the bill are not clearly unconstitutional.

The education reform bill ― which would increase school spending by state and local governments by $3.2 billion over current levels by 2030 ― received some bipartisan support in the 2020 legislative session after Senate amendments included a trigger to postpone the reform plan if the state economy faltered.

Though state revenues are estimated to drop by about $1 billion during the pandemic, the economic triggers have not been met.

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