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February 16, 2021

United States: Maryland enacts new taxes on digital advertising and sales of digital goods

On 12 February 2021, the Maryland legislature overrode Maryland Governor Larry Hogan's veto of legislation (HB 732) that imposes a new tax on digital advertising. The new tax had been approved by the state’s legislature in early 2020 but, rather than signing HB 732 into law, Governor Hogan rejected the bill, noting that it would “be unconscionable” to raise taxes and fees during a pandemic. Under Maryland law, a three-fifths majority of both houses of the legislature can override a veto and make a bill become law without the governor’s signature.

Tax on digital advertising

Effective for tax year 2021, HB 732 imposes a tax on the annual gross revenue derived from digital advertising in the state. The tax applies a graduated rate that increases in increments based on the taxpayer's global annual revenues, as follows:

  • 2.5% of the assessable base for persons with global annual gross revenues of US$100 million1 through $1 billion
  • 5% of the assessable base for persons with global annual gross revenues of more than $1 billion through $5 billion
  • 7.5% of the assessable base for persons with global annual gross revenues of more than $5 billion through $15 billion
  • 10% of the assessable base for persons with global annual gross revenues exceeding $15 billion

HB 732 defines "annual gross revenues" as income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles.

Persons with annual gross revenues derived from digital advertising services within Maryland of at least $1 million must file a return with the Office of the Maryland Comptroller of Treasury on or before 15 April of the following year. Persons that reasonably expect their annual gross revenues from digital advertising services in the state to exceed that amount must file a declaration of estimated tax on or before 15 April of that year and pay quarterly estimated taxes. Persons subject to the tax must maintain records of the digital advertising services they provide in the state to substantiate the basis for their apportionment and calculation of the taxes owed on digital advertising gross revenues.

Failure to comply with provisions of this new tax could result in criminal penalties, including fines and imprisonment.

In anticipation of the veto override of HB 732, bills (SB 787 and HB 1200) introduced 5 February 2021 and 8 February 2021 respectively, would exempt from this new tax advertising on digital interfaces owned or operated by or on behalf of a broadcast entity and a news media entity. A "news media entity" would not include "an entity that is primarily an aggregator or republisher of third-party content." The proposed bills also would prohibit businesses subject to the new digital advertising tax from passing the cost of the tax to the customers who purchase the digital advertising services through a separate fee, surcharge or line-item. If enacted, these exemptions and restrictions would apply to tax years beginning in 2021.

A hearing on SB 787 has been scheduled for 17 February 2021, while a hearing on HB 1200 has been scheduled for 26 February 2021.

Sales and Use Tax on digital goods

The legislature also overrode Governor Hogan’s veto of law HB 932, which applies Maryland's existing 6% sales and use tax to digital products, such as digital code, streaming, music, ring tones, e-books and audio books, movies, online newspapers and cable, satellite and pay-per-view television programming. Retail sales of digital code or digital projects are presumed to be made in the state in which the customer's tax address is located.

Enactment of this provision aligns Maryland sales tax law with more than 30 state-level jurisdictions that also impose their sales and use tax on such goods.

Although the effective date listed in HB 932 is 1 July 2020, the new law will take effect from 15 March 2021. Under the Maryland Constitution, an overridden bill is effective the later of its stated effective date or 30 days after the date of override. Because the date of the bill's override falls on a Sunday, HB 932 is effective on 15 March 2021, the next business day.


A number of legal concerns have been raised about the validity of Maryland's tax on digital advertising implemented by HB 732. These include potential violations of the First Amendment, and the Commerce Clause and Due Process Clause of the United States (US) Constitution. There also are concerns that the tax potentially is pre-empted by the federal Internet Tax Freedom Act, because it targets digital advertising as opposed to other means of advertising, which continue to be exempt from Maryland tax. Thus, even with the Maryland Legislature's override of Governor Hogan's veto, court challenges can be expected to delay or even invalidate the measure.

The tax was also criticized as effectuating bad policy by potentially subjecting entities that provide or purchase digital advertising services in Maryland to a double tax as they already are subject to corporate or personal income taxes on their in-state earnings. Nevertheless, a growing number of legislators in other states, including New York, Connecticut, Indiana, Montana, Nebraska, Oregon and Washington, have recently proposed similar sales/consumption-based taxes on gross receipts from digital advertising services or on the sale or exchange of personal data. Businesses that may directly or indirectly be affected by such taxes should expect to see additional state legislative activity throughout the country.

The legislation delegates to the Maryland Comptroller the authority to promulgate regulations that prescribe how to source digital advertising receipts for Maryland purposes. At this time, the Comptroller has not been given firm guidance regarding how those regulations may operate. There have been discussions – both at the state level and within the tax community – that sourcing may be based on the IP address of the viewer or user, but this approach poses significant logistical challenges and may not be an accurate reflection of the location of a user.

Given the uncertainty of the validity and operation of the tax, any business that meets the global annual revenue threshold, and potentially derives $1 million or more of annual revenue from digital advertising services in Maryland should maintain accurate records and information supporting their revenue determinations and sourcing methodologies. Although this new tax is not part of the state’s sales and use tax regime, it is expected that the state will apply a broad interpretation of nexus, and absence of physical presence likely will not act as a bar to jurisdiction. As such, both Maryland and non-Maryland based entities (including non-US businesses with no US or Maryland presence) should expect to be subject to the tax.


  1. Currency references in this Alert are to the US$.


For additional information concerning this Alert, please contact:

Ernst & Young LLP (United States), State and Local Taxation


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