Maryland Becomes First State to Tax Digital Advertising Revenue

The override of Governor Larry Hogan’s veto of the House Bill 732 on February 12, 2021, has put Maryland into the spotlight as the nation’s first state to impose a sales tax on digital products and streaming services.

The new sales tax, which went into effect on March 14, 2021, targets large, multi-million dollar businesses that pull in a substantial amount of revenue generated from the sale of digital goods and services in Maryland. Many see the new legislation as part of a larger shift to recapture sales tax revenue that’s been lost as a result of the new digital marketplace. The digital products referenced in the guidance from the Maryland Comptroller’s Office include, but are not limited to:

• Digital books, newspaper, magazine, periodical, or any other publication
• A digital download or stream of a motion picture, music video, news and entertainment program, and live event
• A sale, subscription or license to access content online or to use a software application
• An online class, instruction, or similar product
• Access to or use of video or online games
• Design files, models, and templates, such as 3D design files and 3D models
• Photographs, artwork, illustrations, graphics and similar products
• Prerecorded or live music, performance, audiobooks or other written materials
• Prerecorded or live speeches including commentaries, dissertations, and lectures

There are still many uncertainties related to the economic nexus and sourcing rules with regard to these types of products. For instance, the guidance includes sales tax on electronically downloaded software and software as a service, but neither are specifically mentioned in the legislation. In addition, Maryland still faces an uphill battle to implementation, as several tech companies and large businesses have already joined a lawsuit to reverse the legislation.

Even if legal challenges to the new tax fail, further guidance will be necessary for firms to calculate which revenues will be subject to the tax. In the meantime, Ellin & Tucker’s expertise with multi-state tax compliance and planning will point you in the right direction to get the answers you need.

We will continue to update this article as more information becomes available.