Digital Advertising Tax: What You Need to Know

Big Tech has faced growing backlash over its dominant role on the digital advertising landscape throughout the past few years. To many publishers’ frustration, Amazon, Facebook, and Google collected nearly two thirds of digital advertising revenue in the U.S. in 2020, while the two latter players swept the Canadian market, taking 80% of digital ad revenue in the same year. 

“To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons,” said the U.S. House of Representatives’ highly anticipated October 2020 antitrust report, Investigation of Competition in Digital Markets.

Due to tax laws, these behemoth corporations manage to escape paying hefty taxes on the money they’re raking in from millions of customers around the globe—but that almost-free ride may be about to grind to a halt. 

In this article, we’ll explore Maryland’s proposed digital advertising tax, the challenges the state is facing as lawmakers try to push the tax through the court system, which other states are watching the proceedings unfold, and why keeping Big Tech in check is so darn tough to accomplish.

What is the Maryland digital advertising tax?

Maryland passed a bill designed to tax Big Tech’s digital advertising services in February 2021—the first law of its kind in America. The tax is intended to collect money from the tech giants (approximately $250 million in the first year alone) to be distributed as state revenue to areas such as Maryland’s school system. The tax will not only serve to levy what many people would argue are fair fees on Big Tech, but also to help the state recover from budget shortfalls caused by the COVID-19 pandemic.

“The law imposes a sliding scale tax on the money that a company makes from the sale of digital ads that are displayed to the citizens of Maryland,” according to this article by AdExchanger. Here’s how that scale looks:

While this digital advertising tax may seem straightforward at first glance, media companies and industry experts alike say it’s actually fraught with complications, and some even argue that the costs will indirectly be passed onto the tech giants’ customers—many of whom are small business owners. 

Opposition to the Maryland digital advertising tax

In addition to verbal criticism of the state’s digital advertising tax (which does not apply to print ads), several companies have launched lawsuits against Maryland, including telecommunications providers Comcast and Verizon on April 15, 2021. The state has now delayed implementing this tax law.

Comcast and Verizon “asked the court to declare the tax illegal under the federal Internet Tax Freedom Act, which bans discrimination against electronic commerce,” according to this article by Forbes. This recent lawsuit follows another that was launched in February by the U.S. Chamber of Commerce and digital advertising trade groups.

Court battles not only signal trouble for Maryland, but also pose potential challenges for other states such as Connecticut, Indiana, Montana, Nebraska, New York, West Virginia, and Washington, because these states are all expected to introduce similar bills. 

To complicate matters further, the argument that the tax discriminates against e-commerce isn’t the only point of contention for opponents. The plaintiffs in the lawsuits against Maryland also claim that the state’s digital advertising tax unfairly targets interstate commerce, an action that is problematic under the U.S. Constitution.

“While a state may place an income tax on income made within said state, it may not impose what amounts to an excise tax on the act of doing business interstate,” according to this article by MarTech Today. “The tax rates are based on gross revenues earned globally, despite the assessable base being Maryland-only revenues.”

The future of digital advertising taxes

It’s unlikely that implementing the Maryland digital advertising tax will be smooth sailing for the state, and the outcome of the court proceedings will have an impact on other states, as well as the media industry as a whole. American lawmakers and publishers can look across the pond to Europe to gain insight into how other regions of the world are tackling the issue of digital taxation.

For example, “the OECD/G20 Inclusive Framework’s two-pillar project on the tax challenges of digitalization...is aimed at finding a global consensus on how to tax corporate profits from the cross-border provision of digitalized services and products,” according to this article by Bloomberg.

Tax law is complicated by nature and ever-changing, and Big Tech has a big stake (to the tune of billions of dollars) in maintaining the status quo. In the meantime, there are a few ways publishers can continue trying to compete with the tech giants. 

First, media organizations can foster trustworthy relationships with their audiences—an area where publishers already excel. Over 60% of Americans and Canadians trust traditional media, while less than 30% trust social media, according to The Edelman Trust Barometer 2020. 

Publishers can also get ahead by providing their advertisers with brand safe environments to promote their messages, as well as first-party-data-driven, personalized advertising campaigns—two things Big Tech can’t always deliver. Finally, media companies must leverage the power of customer service and human relationships to highlight their value to customers.

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