Tech lobbyists and the U.S. Chamber of Commerce are challenging Maryland’s newly passed digital advertising tax in federal court ― days after Democrats in the General Assembly voted to enact the tax over Republican Gov. Lawrence J. Hogan Jr.’s veto.
“It’s unfortunate that the Maryland General Assembly has decided to penalize a handful of out-of-state companies with this discriminatory law. This is a case of legislative overreach, punishing an industry that supports over one hundred thousand jobs in Maryland and contributes tens of billions of dollars to its economy each year,” Jon Berroya, senior vice president and general counsel for Internet Association, said in a statement.
“Internet services and companies are proud to play a role in creating opportunities for Maryland’s small businesses and citizens. We look forward to defending our industry in court,” he said.
The Internet Association is the only trade association that exclusively represents leading global internet companies in public policy debates. The group lobbied against the passage of the bill in Maryland.
The first-of-its-kind tax was enacted by the Maryland General Assembly on Friday, and the lawsuit was filed Thursday in U.S. District Court.
The other plaintiffs are NetChoice and the Computer & Communications Industry Association.
The groups argue that the tax is “a punitive assault” on digital advertising and violates the U.S. Internet Tax Freedom Act as well as the commerce and due process clauses of the U.S. Constitution.
Because of his role as chief tax collector for the state, the lawsuit is filed against Comptroller Peter V.R. Franchot (D). Franchot repeatedly discouraged lawmakers from hiking taxes to fund a multi-billion-dollar education reform plan.
The digital advertising tax could yield as much as $250 million annually in new revenue, analysts suggested during the legislative debate last year.
But the groups in the lawsuit argue that the new law is not a “tax,” but a “punitive fee, penalty, or fine” that mostly targets tech companies’ actions outside of Maryland.
As passed, the digital advertising tax would levy a tiered assessment based on a company’s annual digital advertising revenue in Maryland and its global gross revenues. Companies that make more than $100 million in global gross revenues annually would pay a 2.5 percent tax on annual revenues from digital advertising in Maryland. That tax rate increases up to 10 percent for companies that make more than $15 billion globally.
The plaintiffs lay out an example in the lawsuit: if a company derives $10 million in annual revenues from digital advertising in Maryland and makes less than $90 million in revenue outside the state, they would pay nothing. If that same company makes more than $90 million outside Maryland it would pay $250,000. And if the company made more than $15 billion globally, it would pay $1 million in Maryland taxes.
“There is no explanation for this design except a legislative purpose to punish large, out-of-state digital advertising companies for their extraterritorial activities,” the lawsuit states.
Democrats who supported the bill during legislative debate said the tax would require large tech companies ― with the power to store and manipulate users’ data and fuel misinformation campaigns ― to support public civic infrastructure.
Small companies in Maryland have also opposed the tax, arguing that large tech companies will pass the fee on to them.
“Unfortunately, these very powerful, very wealthy corporations have engaged in a campaign of fear-mongering in this state, telling our small business owners if your legislators apply a tax to us, if they ask us to pay our fair share, we’re gonna have to increase your ad costs,” House Majority Leader Eric G. Luedtke (D-Montgomery) said last week. “Well, I don’t want ad costs to go up for my small businesses, so I’ll tell you what: we’re calling their bluff.”
Earlier this month, he and Senate President Bill Ferguson (D-Baltimore City), who sponsored the original digital ad tax bill, introduced an emergency bill that would attempt to prohibit tech companies from passing the tax down to advertisers through a fee or surcharge.
The lawsuit claims the new bill further bolsters the argument that a single industry is being punitively targeted.
On Wednesday, the Senate Budget and Taxation Committee held a hearing on the emergency bill.
Ferguson said while he was still “disbelieving” that tech companies could pass the cost of the digital advertising tax on to small companies, the bill could make that certain.
“From the beginning it was very clear that the goal of this assessment on gross receipts was focused on the platforms that are brand new in the last 20 years and that have evaded every single taxation method in the state of Maryland,” Ferguson said.