States across the country have been looking for a way to have internet advertising platforms pay “their fair share” for the advertising dollars that are generated in their state. Maryland has passed a first-of-its-kind Digital Advertising tax taking aim at organizations across the country who advertise to Marylanders. States like Indiana, Connecticut, and New York are quickly following suit with similar taxes currently under review.
In Maryland, this new law imposes tax rates of up to 10% on all revenue earned from placing digital ads in the state. The tax rate is set based on the total revenue a company earns. The highest rate is reserved for the big platforms — think Facebook, Microsoft, Amazon, and Google. And before you say, “they gross billions; a new tax won’t hurt them,” think about who is really going to be incurring the increased costs. It’s not likely that these platforms will accept this tax increase without taking action. The likely scenario is that those costs will be passed on to the advertisers including nonprofits, small and medium-sized businesses, and large corporations in the way of increased advertising costs and new restrictions.
Governor Hogan vetoed the bill, but the State Senate overturned his veto with a bipartisan vote of 88-32. With the Governor’s veto overturned, the new tax law is slated to be applied to the totality of 2021 income for the organizations that fit the criteria. The estimated increase in revenue to the state exceeds $250M and is earmarked to support education.
The proposed tax ranges from 2.5% to 10% dependent on the WORLDWIDE gross revenues of the organization, NOT the amount of revenues from Maryland alone. Companies grossing more than $100M will incur a tax of 2.5% while those grossing $15B or more will be taxed 10% on any revenue generated from placing a digital ad in the state.
Despite claims by lawmakers, the massive organizations won’t be affected by this tax because they will pass the cost on to the advertiser and eventually to the Maryland consumer. The majority of the $250M estimated revenue will be paid for by the businesses and citizens of Maryland — not Google, Facebook, and Microsoft.
Think about your local lawn service, who reaches their potential consumer through social media, and only profits 10% as they start up their business. The increased cost will limit their ability to advertise, which will reduce their ability to capture customers. The domino effect will put many companies out of business. The majority of the burden will be placed on SMBs and smaller nonprofits that advertise in Maryland, and we can expect to see the loss of smaller advertisers, options for consumers and, ironically, revenue to the state due to a decrease in the number of businesses and related income tax.
The tax is “directed” at the for-profit advertising platforms, but nonprofits will also feel the impact. Our industry will see an increase in advertising costs, the same as other industries. We have seen large growth occurring through digital channels and there will be huge impacts to the fundraising community because of this tax. This includes increased ACQ costs in Maryland and other states in the future and reassessment of long-term fundraising projections based on future state digital tax initiatives. Cost of fundraising percentages will increase, negatively impacting ratings and potentially suppressing response rates. Smaller nonprofits won’t be able to leverage current cost-effective digital channels and complete their missions.
A lawsuit has been filed in a Maryland district court by multiple groups including the US Chamber of Commerce and the Internet Association, looking to stop the implementation of the new tax law. If the lawsuit is successful, we anticipate the state looking at other ways to get their hands on a piece of the massive advertising business. If the lawsuit is unsuccessful, other states will quickly pass similar legislation, changing advertising for organizations around the world.