Silicon Valley is pushing back against Maryland after the state enacted a new digital advertising services tax that will impact the advertising revenues of the nation’s largest tech companies.
Maryland’s state legislature fought hard to initiate a first-of-its-kind tax on digital advertising revenues, even having to override a veto from the state’s governor. The tax is meant to be imposed on non-media companies which undertake digital advertising, like Google and Facebook.
The tax rate varies depending on the size of the company in question. The tax begins at a rate of 2.5% for companies with global annual gross revenues of $100 million to $1 billion. It then goes up to a rate of 10% for companies with global annual gross revenues exceeding $15 billion.
The top tax rate is the one into which Big Tech companies fall. In 2020, the annual gross revenues for major online advertising companies such as Facebook, Alphabet Inc.’s Google, Amazon, and Microsoft each exceeded $15 billion.
According to Maryland’s estimates, the tax could raise as much as $250.0 million in its first full year.
The new tax is already drawing pushback from the companies it affects. A lawsuit was filed in the United States District Court for the District Of Maryland Northern Division, alleging that the state tax is preempted by federal law and, therefore, it violates various constitutional prohibitions against state taxes on out-of-state activity.
The lawsuit is led by the U.S. Chamber of Commerce and three tech industry interest groups: Internet Association, NetChoice, and Computer & Communications Industry Association. The three interest groups have varying membership, but Google, Facebook, and Amazon are among those members.
“The Internet Tax Freedom Act was created to prohibit precisely what Maryland is doing here by imposing discriminatory charges only for online forms of advertising,” said Steve DelBianco, president and CEO of NetChoice.
The lawsuit itself alleges a variety of flaws in the tax’s purpose and the outcomes that will come from it.
“Maryland lawmakers acted on the belief that large digital advertising companies are ‘too big to trust’ and have created ‘a haven for dangerous misinformation and hate speech,’… The premise of the law is deeply flawed. Taxing digital advertising revenue will have the opposite of the Act’s intended effect, reducing resources to support the creation and availability of high-quality ad-supported content, leaving the online field overrun by low-quality ‘junk’ content,” read part of the lawsuit.
The lawsuit also alleged that the new tax would be bad for consumers as well as the Big Tech companies.
“The Act will raise costs for consumers and make it more difficult for businesses to connect with potential customers. Simply put, the Act will harm Marylanders and small businesses and reduce the overall quality of internet content—all while doing nothing to stave off the dissemination of misinformation and hate speech,” read the lawsuit.
Concerns have not just come from parties representing the interests of Big Tech but also members of Maryland’s government. Maryland’s Attorney General Brian Frosh identified “some risk that a reviewing court would find that the tax is unconstitutional” in a public letter in April. Maryland’s governor Lawrence Hogan attempted to veto the bill but was eventually overridden.
Despite these concerns, some do not view the tax as a major risk to leading digital advertising companies, given Maryland’s small geographic reach.
“At this point, I don’t think it is that big of a deal. Let’s see if other states jump on board and what those tax rates will be. Worth tracking, but we haven’t re-thought things yet,” said Michael Nathanson, a senior research analyst at MoffettNathanson who covers leading digital advertising companies.
