The expected legal challenge to a first-in-the-nation tax on digital advertising has been filed. The joint suit filed last week in federal court in Baltimore says the new tax is a “a punitive assault” on digital advertising and is “illegal in myriad ways.”
Maryland’s legislature this month overrode a gubernatorial veto to adopt a tax that will initially hit the biggest online players. The law imposes a 2.5% tax on companies that have between $100 million and $1 billion in digital advertising revenue and a 10% tax on companies with more than $15 billion in digital ad revenue. Lawmakers said the move will generate as much as $250 million a year for schools, but some critics argue it could pave the way for ad taxes across all media.
The U.S. Chamber of Commerce joined with a trio of digital advocacy groups, including the Internet Association, NetChoice, and the Computer & Communications Industry Association asking the federal courts to block the state law from taking effect. They say Maryland legislators “disapprove of large digital advertising companies and intended to penalize them” with the new tax. The groups also challenge the idea that the creation is a tax at all, suggesting it more accurately falls under the federal definition of a “punitive fee, penalty, or fine” as it goes after Amazon, Facebook, and Google.
Broadcasters and other media have joined with advertisers through the years to defeat other ad tax proposals with the argument that such measures would hurt a state’s overall economy and job market. It is a case that is also being made in Maryland by the U.S. Chamber and the digital advocacy groups. They also suggest it will lead to a digital landscape “overrun by low-quality ‘junk’ content” while making it more difficult for businesses to connect with potential customers.
“Online advertising is almost twice as efficient as traditional television advertising in converting advertising spend into sales revenue,” their 20-page complaint claims. “And it is particularly valuable for small businesses that cannot afford expensive television, radio, or print ad campaigns. Digital advertising allows those merchants to start small, focus on the most relevant audience, and expand a campaign if it attracts new business.”
The Internet Association, which is made up of big tech companies including Spotify, called the law “discriminatory” and said it was proud to be defending the digital industry in court. “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,” said Association Senior VP Jon Berroya.
The lawsuit alleges the tax violates the federal Internet Tax Freedom Act, which prohibits “multiple and discriminatory taxes on electronic commerce.” It also alleges it violates federal interstate commerce laws by “burdening and penalizing purely out-of-state conduct.”
CCIA President Matt Schruers said he thought the Maryland Legislature is setting up the state for failure, saying digital services make a “critical contribution” to local economies and keeping people connected to school, work, and family. “The Maryland legislation suffers from numerous constitutional infirmities and we expect it to be blocked on legal grounds,” he said.
When the Maryland bill was still gathering steam last spring, a wide array of media groups – including the National Association of Broadcasters voiced their opposition to the proposal. One move that could help lessen radio and TV’s worries that a tax could hit them next came two weeks ago when Maryland Senate President Bill Ferguson (D) told the Baltimore Sun he plans to introduce follow-up legislation that would prohibit the digital ad tax from being extended to other media outlets, including radio and television.