By: Melanie A. Bigos
On February 12, Maryland became the first U.S. state to enact a digital advertising tax. According to the bill, digital-advertising services include “advertisements in the form of banner advertising, search advertising, interstitial advertising, and other comparable advertising services.” Businesses making between $100 million and $1 billion in global revenue will have to pay a 2.5% tax on their profits from digital ads shown within the state of Maryland. This percentage scales up in accordance with total revenue; for companies making over $15 billion, which applies to both Google and Facebook, the tax rate imposed is 10%. The tax is estimated to generate up to $250 million during its first year of enactment and funds are intended to be designated for education reform.
State Senator Bill Ferguson, a former teacher and one of the bill’s architects and proponents, described the tax as a means of ensuring Big Tech pays taxes in Maryland, as small businesses in the state are already doing. He justified the tax, explaining that “at a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and businesses can foot the bill, or Big Tech can start paying their fair share.”
However, the bill, since its origin, has been met with strong opposition, especially from business and technology groups. Lobbying groups representing several Big Tech companies critiqued the bill upon its passage, stating that it would subsequently harm smaller businesses who depend on digital advertising to bring in new customers. This criticism culminated in a lawsuit filed on February 18th by the aforementioned lobbying groups, including the U.S. Chamber of Commerce and the Internet Association, the latter of which represents the interests of companies such as Google, Amazon, eBay, and Facebook.
The suit alleges that the new state law is not only “deeply flawed,” but illegal and unconstitutional as well. It furthermore claims that the law discriminates against interstate commerce and unfairly targets online advertisements. For example, the plaintiffs have alleged that the tax is in violation of the Internet Tax Freedom Act, a federal statute which bans state and local taxation of internet access.
Disregarding the anticipation of vocal pushback and onslaught of litigation, the lawmakers behind the bill persisted in ensuring its authorization. Senator Ferguson defended the tax, positing that Big Tech companies have made no contribution to the people of Maryland despite the fact that “for two decades, these companies have grown exponentially by availing themselves of the privileges of states, benefited from the aggressive uncompensated collection of personal and private information about Maryland’s residents, and have been free riders to Maryland’s investments in our civic infrastructure.”
The massive profits reaped by Big Tech through digital advertising served as a major temptation for Maryland, as well as states including Connecticut, Indiana, Montana, Nebraska, and New York, which have been considering similar bills. However, the law’s construction may indicate an unlikely survival against the legal challenges that have already arisen. First, the litigation expenses may already cut into the funds intended for Maryland’s education system.
Secondly, there is a fear among market analysts that the law will detrimentally and disproportionately affect smaller local businesses rather than Big Tech companies such as Facebook and Google, because the burden could ultimately pass down from the larger companies to the advertisers themselves if the law proliferates beyond the state of Maryland. While these concerns represent palpable flaws within the bill’s construction, it should not necessarily rule out taxation of a major source of revenue – in this case, the digital advertisement industry. At its core, the tax aims to redistribute major profits collected within the state in order to better serve its residents. Yet the Constitutional concerns, especially those regarding selective taxation, may forge a difficult path for the state in their defense.
While it is ultimately up to the courts to weigh the legality of the law, the pushback against the legislation demonstrates how a profitable service has become a major point of contention. While the lucrative nature of digital advertising appears to be an opportunity to hold Big Tech companies accountable and redistribute the massive amount of revenue generated to more evenly benefit the community, the courts may very well argue in favor of the lobbying groups and determine that this selective taxation is inherently unconstitutional.
Many of the lawmakers understood the risk and anticipated pushback even before the bill was enacted, yet still defend its constitutionality. Should the law survive, it would certainly incentivize other states to levy similar taxes, which would have an exponential impact upon Big Tech. The lawsuit will ultimately present the courts with the opportunity to determine whether the goals of the tax can be fulfilled in both theory and practice without posing a discriminatory or unconstitutional burden on targeted companies.
Student Bio: Melanie A. Bigos is a second-year law student at Suffolk University Law School and serves as a Staff Member on the Journal of High Technology Law. Melanie holds a Bachelor of Arts in Psychology from Boston College.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
