Eric Luedtke, a Maryland Democratic delegate, wants to tax large tech companies to fund the state’s K-12 training.
And if other states follow suit, so be it.
“States tend to annoy each other when they shape their policies,” said Luedtke. “And often with things like that you have a state that acts as a test case that goes to court, and then, you know.” When the courts say, “That’s okay,” you see other states are starting too. “
The OK court is in the air. Maryland’s new tax, enacted by state lawmakers removing a veto from Republican Governor Larry Hogan, provides a tax on all digital advertising revenue for businesses that generate over $ 100 million in advertising revenue worldwide each year achieve.
And while it’s due to begin next month, the law is the target of lawsuits from major tech companies and industry groups arguing that it violates the Internet Tax Freedom Act (ITFA), a 1998 federal law that “prevents state and local governments from doing so.” “Taxing Internet access or levying multiple or discriminatory taxes on electronic commerce,” according to the Congressional Research Service.
How this lawsuit develops will have a significant impact on government efforts to increase taxes on technology companies. Even a loss could provide states with a kind of playbook for how to proceed.
“Maybe there are short-term problems with the tax,” said Lilian Faulhaber, a law professor specializing in tax law at Georgetown University. “But when a lot of states follow Maryland, and a lot of states think about it because they need income in tax.” After Covid and because citizens are being asked to tax big tech, it could actually lead to some reform of the ITFA. “
When Congress passed the Internet Tax Freedom Act, the moratorium on taxing Internet access and e-commerce was supposed to last three years, but was extended eight times.
Groups representing state governments, including the National Governors Association, have called for more government oversight over the taxation of internet businesses. In a testimony before the Senate Committee on Commerce, Science and Transport in 2007, the group’s director of federal relations urged Congress to “review the scope of the moratorium in the light of technological advances” and update the law’s definitions “to Ensure this You reflect the intentions of Congress and do not interfere unnecessarily with the state tax authorities. “
The 1.2 million square foot BWI2 Amazon Fulfillment Center in Baltimore.Chip Somodevilla / Getty Images file
The lawsuit in Maryland, filed by the U.S. Chamber of Commerce and a coalition of industry groups and companies such as Amazon, Google, and Facebook, alleges violations of the Internet Tax Freedom Act and the Constitution’s trade and procedural clauses.
“Ultimately, this is such a bad tax policy and it’s illegal,” said Stephen Kranz, partner at McDermott Will & Emery and attorney for the Maryland Law plaintiffs. “It will be defeated. It’s not about if, it’s about when. “
But like other Internet regulations that were passed in the 1990s, including the Communications Decency Act and its Section 230, which protects social media companies from lawsuits over user content posted on their platforms, the Internet Tax Freedom Act is viewed by some as being outdated.
“The original version was designed and adopted in 1998. The Internet was a completely different place back then,” said Faulhaber.
There are already states following Maryland’s cue. Connecticut has introduced bill into state law to levy taxes on gross annual social media advertising income in the state. A bill introduced at the last session of the New York legislature would have charged sales tax on digital advertising.
Whether Maryland wins the lawsuit could depend on a similar case from South Dakota, which imposed sales tax on companies with gross state revenues above $ 100,000 even if the companies were not in the state. The Supreme Court upheld the law in 2018, allowing South Dakota to collect sales taxes from large non-state sellers. The ruling overturned an earlier Supreme Court ruling, which the judges believed was no longer constitutional or applicable in light of the changing media landscape.
By the end of 2018, 31 states had imposed sales tax on large non-state retailers.
Faulhaber said she expected the same avalanche of state legislation if Maryland’s digital advertising tax was seen constitutional.
“If Maryland’s tax goes forward, many other states will follow,” she said. “Even if a company in Maryland doesn’t have a lot of revenue at stake, it may oppose it because it fears that it could have a lot of revenue at stake in other states.”
Maryland Senate President Bill Ferguson, a Democrat and the state’s biggest advocate for the new tax, said he was confident the new law was legal.
Businesses make money from digital ads in Maryland and the constitution allows states to regulate business within their borders, he said.
“I find it quite disturbing that there is an indication that states do not have the right to regulate business activity within state lines,” he said. “I don’t think our constitution was designed like that, and I would suggest that anyone who argues differently should really think carefully about what this means for their belief in our constitutional system of government.”