Report from StateAndLocalTax.com
In Brief – The Comptroller of Maryland, the state’s tax authority, has finally issued guidance detailing its position on the application of the state’s landmark Digital Advertising Gross Revenues (DGAR) tax, which was enacted in 2021 and took effect in January 2022. The legislation defines taxable “digital advertising services” as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The Comptroller says that covered advertisements must be in a “digital” (i.e., binary digits) format but not necessarily delivered over the Internet. The Comptroller limits the DAGR’s scope by instead requiring that the digital ads be delivered in a “programmatic” manner, meaning “automated”, and “conveyed visually”. Non-programmatic digital advertising services are not taxable. Digital advertisements that are “conveyed in a purely audio format” are also not taxable.
Context – Several US states have explored taxes that aim to replicate the foreign “digital services taxes” (DSTs) that increase taxes on digital giants like Google, Meta, and Amazon. National DSTs emerged in 2020 and have been strongly opposed by President Trump. Maryland was the first US state to try something similar, taxing large online advertising businesses in 2021. On its face, Maryland’s law appears to violate the federal Permanent Internet Tax Freedom Act (PITFA) because offline advertising is not taxed the same way as online ads, and both federal and state judges have found Maryland’s law in violation of PITFA. However, a morass of jurisdictional challenges has tied up the litigation for years and it is currently in the Maryland Tax Court, a state tax administrative body. The latest guidance from the Maryland Comptroller is clearly an effort to circumvent the federal law and satisfy the necessary judges while taxing the desired digital giants. New York, California, Washington State, Rhode Island and Minnesota have pursued their own types of digital taxes and backers call for a coordinated digital ads tax state campaign reminiscent of the successful effort that expanded state sales tax collection to internet-enabled retail.