In what appears to be first-in-the-nation legislation, social media companies such as Facebook and Google would face as much as a 10 percent tax on the revenue from digital ads that target Maryland IP addresses.
It’s part of new Senate President Bill Ferguson’s effort to tap untaxed corners of the modern economy, and he deployed one of the state’s most savvy political minds to get it passed: his predecessor, Senate President Emeritus Thomas V. Mike Miller Jr.
“I figure it’s better the Russian trolls help fund education than property tax, or income tax, or sales tax,” Miller (D-Calvert) said in an interview, referring to the Kremlin’s use of social media platforms to interfere in the 2016 election. Miller, who ended his 33-year tenure in power this week, has forced some of Maryland’s most controversial policies into law, most recently the legalization of casinos.
The Maryland legislation would apply broadly to the most ubiquitous forms of online advertising: banner ads, pop-up ads in the middle of websites and search engine ads — including the ones tailored from a user’s browsing history.
The details of administering Maryland’s proposed tax would be determined by the state’s tax collector, but the legislation relies on self-reporting from tech companies.
Maryland leaves it up to companies to report how much revenue the firms earn from digital ads on devices that either have an Internet Protocol address in the state or “is known or reasonably suspected” to be used here. If that revenue exceeds $1 million, the legislation would require companies to file a state tax return estimating how much they owe in digital advertising taxes. The companies would have to keep records of advertising sales.
Ferguson, the Baltimore Democrat who drafted the plan, said he was inspired by economist Paul Romer, a Nobel laureate who suggested earlier this year that such a tax could use market forces to shift tech companies’ business models — creating a disincentive for profiting off the collection of private data.
The proposal, Ferguson said, could both fund a sizable chunk of the education changes he’s championing and put “some guideposts around the intrusive aggregation of data of individual Marylanders.”
“It’s an assessment on the platforms for the use of Marylanders’ data, for which, right now, companies are not paying a cost to access,” he said.
Internet advertising is big business: The Interactive Advertising Bureau reported 2018 digital ad revenue exceeded $100 billion nationwide, and it grew 21.8 percent from 2017.
Representatives of Facebook and Google declined to comment on the legislation.
It was not immediately clear whether the legislation would apply to other online platforms that host digital ads, such as The Washington Post.
Companies with less than $100 million of annual, global online advertising revenue would be exempt. The graduated tax rate would climb from 2.5 percent for firms with $100 million in online sales to 10 percent for those with $15 billion in global advertising revenue.
The approach also raised questions about the limits of taxing Internet commerce. While other states have expanded their sales taxes to apply to digital products such as streaming services or music downloads, it appears none has created a new tax for digital advertising, according to Maryland tax experts and others.
Robert Callahan, a senior vice president for the Internet Association, which represents many big tech firms, said in a statement: “While we are still reviewing the proposal, we have serious initial concerns. The bill appears to stand on questionable legal footing and unfairly discriminate against a single segment of the advertising sector.”
The Internet Tax Freedom Act, originally passed in 1998 and reinstated several times, sets limits on the taxation of Internet access and bars taxation on certain things, such as taxes on emails.
Ferguson and other state lawmakers are searching for a way to raise money to pay for a $4 billion per year revamping of public schools, a set of proposals known as the Kirwan recommendations. Ferguson and his counterpart in the House of Delegates, Speaker Adrienne A. Jones (D-Baltimore County), pledged not to increase property, income or sales tax rates to pay for them.
Gov. Larry Hogan (R), who has derided the school changes as “pie-in-the-sky” and too costly, declined to comment on the prospect of taxing targeted digital ads.
“If or when the legislature finally releases a detailed plan to pay for Kirwan’s massive price tag, we will certainly take a look at it,” Hogan spokesman Michael Ricci said in an email. “The question remains: where is all the money coming from?”