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The Digital Ad Tax: Taxation of Digital Representation

In February of 2021, Maryland became the first state to pass a digital ad tax law, and a whole gaggle of states are already planning to follow in their footsteps. The Maryland Digital Advertising Gross Revenues Tax imposes a sliding tax on annual gross digital advertising services' revenues of large companies in the state.

While Maryland’s law is facing many legal challenges and criticism from digital ad sellers and buyers, we don’t expect the concept of a digital ad tax to go away.

Let’s Back Up a Little

Back in 2017, the managing director of the Rockefeller Foundation, Saadia Madsbjerg, wrote a New York Times OpEd arguing for the need to tax companies to use consumer data. By imposing a small tax on digital ad revenues, consumers will “share in some of the financial benefits obtained from the use of their data,” Madsbjerg writes.

Flash forward to 2020 and a global pandemic, and states are turning over every stone, looking for ways to fill funding gaps brought on by an economic recession. A digital ad tax could be a fantastic way to generate more tax revenue without raising taxes on regular citizens.

How Does It Work?

In the case of Maryland’s digital tax law, a tax is imposed on the money that a company makes from the sale of digital ads displayed to citizens of Maryland. The amount a company pays is based on its annual global revenue.

  • 2.5% for businesses making between $100 million to $1 billion

  • 5% for businesses making more than $1 billion

  • 7.5% for businesses making more than $5 billion

  • 10% for businesses making more than $15 billion

Big digital advertisers such as Google and Facebook make more than $15 billion a year. Heck, they make more than that a quarter, so they’d be in the highest bracket.

As you might expect, taxing digital ads is not a simple matter. One glaring challenge this law faces is knowing where someone viewed an ad. For example, what if someone is viewing an advertisement as they cross into Maryland from another state? How is that handled?

Another issue arises when you consider the complexity of the digital ad ecosystem. The law could be interpreted to impose a tax on multiple players in the supply chain, including publishers, demand-side platforms (DSPs), supply-side platforms (SSPs), and data management platforms (DMPs). The question of who this tax applies to is complicated further by the lack of transparency in the supply chain in general. Advertiser-funded research from ISBA found that only about half of ad spend reaches publishers, and about 15% can’t be attributed to any known players in the supply chain.

There are also legitimate concerns regarding the law’s constitutionality and legality. It may violate various federal laws, including the Permanent Internet Tax Freedom Act, the Due Process Clause, the Commerce Clause, and the Dormant Commerce Clause of the US Constitution.

Who is Affected?

By only targeting companies with annual gross revenues over $100 million, it’s pretty evident that the law is directed at Big Tech. In its first year, Maryland estimates the digital ad tax will generate around $250 million, which can help fund public schools, unemployment, and other services Marylanders would benefit from.

There is a valid concern that the cost of a digital ad tax will ultimately be passed along to smaller advertisers who use larger platforms such as Google, Facebook, or LinkedIn to target users. This could hurt businesses who advertise to audiences in Maryland, create higher costs for users who consume digital content in the state and reduce spending on media inventory in the state.

The Future of the Digital Ad Tax

Even if Maryland’s law ultimately gets struck down, we don’t expect the concept of the digital ad tax to disappear. Other states will simply modify their proposals to avoid the same pitfalls until they create legislation that stands up to muster. Therefore, it benefits everyone to find a way to balance the taxation burden while still rightfully and reasonably taxing a booming industry.

Our lives are increasingly lived less in the context of physical boundaries and more in the realm of virtual, fluid spaces. Lawmakers should be making legislation that addresses these new worlds. Unfortunately, they’ll likely stumble some before they get it right. As new laws and regulations further complicate digital advertising efforts, you may find yourself in need of a media steward who will help you through the process. Contact The Ward Group today to meet our team of media planners and buyers and start building your digital ad campaigns.

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