More than six months after Governor Larry Hogan vetoed the Maryland’s proposed first-in-the-nation digital advertising tax, the legislature has moved forward with overriding the governor’s veto. In so doing, they fulfilled the fears of small businesses and consumers worried about having to bear the burden of the new tax. Now the bill’s lead advocate, Senate President Bill Ferguson, is attempting to assuage these concerns with a hilariously ineffective proposal to simply tell digital firms that they may not pass on the costs of the state’s digital tax.
Maryland passed its digital advertising tax legislation early last year, but was prevented from implementing it by Hogan’s veto in May. Nevertheless, like a man who has been saved from shooting himself in the foot by a concerned friend who then proceeds to successfully shoot himself in the foot soon after, the necessary supermajority of Maryland’s legislature decided to override Hogan’s veto.
The bill is foolish for several reasons, not the least of which is the fact that it will face serious legal challenges on multiple points. But even if the bills were legally flawless, digital advertising taxes suffer from other, more pressing problems.
SB2, the legislation at issue, attempts to create a four-tiered gross receipts tax on businesses with digital revenue in Maryland based on their global revenues. Businesses with global revenues over $100 million would face a 2.5 percent gross receipts tax, with rates raising up to as high as 10 percent for businesses with global revenues over $15 billion.
The fact that this tax is structured as a gross receipts tax makes these rates effectively even higher than they look — a business with over $15 billion in revenue would have to run a profit margin of 10 percent in Maryland just to break even. Most would likely decide their advertising dollars were better off spent elsewhere.
Though we likely need not shed tears for said multi-billion dollar companies, the impact would be felt by Maryland businesses. Practically, the impact of the tax would be to make it harder for Maryland companies that rely on digital advertising revenue to find inexpensive platforms for their promotion, driving up costs for small businesses and reducing their ability to compete with more established players.
Though they ostensibly target large tech firms, in practice digital taxes generally fall upon small businesses and consumers, who are already reeling from the effects of COVID-19. A 2019 Deloitte/Taj study analyzing a similar French proposal found that large digital advertising businesses would bear a measly 5 percent of the burden of France’s digital advertising tax proposal. Instead, the remaining 95 percent would simply be passed on to smaller businesses that rely on online advertising revenue, like news outlets, and consumers.
Of course, Senator Ferguson isn’t about to let some measly laws of economics stop him. Responding to concerns about SB2, Ferguson recently introduced legislation to tell digital firms that they were not allowed to “directly” pass on the cost of the tax.
This is reminiscent of when Representative Bill Sali of Idaho introduced satirical legislationsuspending the law of gravity to combat obesity, saying that it was as realistic as lawmakers attempting to suspend laws of economics. The simple economic truth is that taxes are ultimately passed on in large part to consumers, whether the Maryland legislature wants them to or not. Ferguson’s bill prohibits the imposition of a separate fee or line-item charge, but it does not (and cannot) alter the economic reality that this tax will lead to higher advertising prices for Maryland-based businesses.
Other states considering digital taxes of their own should recognize Maryland’s effort for what it is: a legally dubious and economically illiterate effort that is doomed to failure. Though amusing, ultimately Maryland’s reckless legislation will hurt people and small businesses at a time when the economy is still on the road to recovery.