Maryland will be the first state in the nation to tax digital advertising. Here are 4 things to watch

Maryland will become the first state in the nation to take a new approach to paying for education: taxing digital advertising.

With the new law, the state will collect a tax of between 2.5% and 10% on revenue that a company makes on digital advertising. Aimed at the big tech companies like Google, Amazon and Facebook, the law could generate up to $250 million in the first year.

The move to cement HB 732 as law was made official last week with votes by both Democratic-controlled houses of the Maryland General Assembly to override a veto by Gov. Larry Hogan, a Republican. It comes a little over a year after the measure was initially proposed by Senate President Bill Ferguson (D-Baltimore City), who has been no stranger to policy around the innovation economy and rose to the senate leadership role last year.

The policy was initially introduced in 2020 as one of the sources of revenue to pay for a nearly $4 billion package of reforms to education funding and standards proposed by the state’s so-called Kirwan Commission, which Democrats in the state legislature are enacting into law with a separate override vote. It’s not the only way to pay for it: The same bill that is enacting the digital advertising tax is also upping cigarette taxes. And individual districts will also have to pay in.

Yet with its novelty, the digital advertising tax has drawn the most organized opposition. It drew fierce opposition from the big tech companies. Hogan, who won the governorship after his “Change Maryland” campaigns opposing new taxes, and said at the time of the veto that he did not want to add budget pressure in the pandemic. This year’s move to override that move drew fresh opposition, as a group called Marylanders for Tax Fairness started campaigning with ads and emails in the months before the annual legislative session began.

Moving forward with the tax makes Maryland the earliest U.S. adopter of a state move toward taxing services from the big tech companies. It is not alone in considering such a move, and follows in the footsteps of other policies aimed at the tech giants in Europe. As The Washington Post reported, states like Kansas, New York and Washington have put forward similar proposals. Even as Maryland jumps first, there’s a cliff approaching that could lead others to follow in 2021: States are facing ever tighter budgets.

With that in mind, below are two practical questions and two philosophical questions to watch about where the policy goes from here. Let’s start with the immediate business:

Will smaller businesses end up paying?

Ferguson says no, as he wrote in a Facebook post that the tax will only apply to businesses that make more than $100 million a year from digital advertising alone. He framed it as “a vital mechanism to make sure big tech pays taxes in Maryland, just like our small businesses.”

But the question is being voiced by opponents of the bill. While the big tech companies are the ones who are being taxed, they collect money from smaller businesses to run ads on their platforms. The bill has raised the specter that the tech companies would pass costs on to the Maryland companies who pay for advertising. Ferguson filed a separate bill this week that’s designed to stop that from happening.

Robert Callahan, senior VP of state government affairs at the Internet Association, which represents the tech industry, said in a statement that the bill will “harm Maryland businesses struggling to survive a pandemic and could not come at a worse time.”

“Digital advertising is a critical lifeline for myriad small businesses and nonprofits throughout Maryland who rely on affordable internet services like these to attract and keep new customers,” Callahan said.

Will it survive legal challenges?

Unable to stop the General Assembly from overriding the bill, opponents have also said they plan to take the law to court. Specifically, Dan Jaffe, the Association of National Advertisers’ group executive VP of government relations, brought up the Internet Tax Fairness Act, which he said “bans discriminatory taxes on Internet digital communications.” Other concerns have been raised about the fact that the tax rates are applied to a company’s overall income on digital advertising, not solely that made in Maryland.

“It will create a highly toxic marketplace for digital advertising and needs to be overturned in the courts,” Jaffe said in a statement.

There has been warning about this from officials, too. Maryland Attorney General Brian Frosh wrote last year that “there is some risk” of the law being struck down, the Baltimore Business Journal reported.

And now, the deeper questions …

What’s the responsibility of big tech companies to society?

It’s a question that was explored throughout the tenure of President Donald Trump as companies reckoned with their role in the 2016 election hacking, and battled misinformation four years later.

This tax reorients the conversation from elections to education. The big tech companies have seen massive profits, and those have only grown in the pandemic. So they are now under pressure to give back to society. Funding education — in this case, a bill that is specifically geared toward an equitable funding system — is one way to do that.

As Ferguson put it: “At a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and businesses can foot the bill, or big tech can start paying their fair share.”

Should tech companies pay for using our data?

As the big tech companies’ methods have come into wider focus, we’ve also seen heightened questions about how the data that its users enter is part of the companies’ business model. While Facebook offers a free service for users, it in turn uses that data to fuel sophisticated advertising techniques. It brings to life the idea behind a famous quote about internet businesses: “If you’re not paying for it, you’re the product.”

While there isn’t yet a widely used way for individual people to make their own money from that data, the bill’s supporters say the a tax goes toward improving life for everyone.

“These large digital ad firms use Marylanders’ private information to sell targeted ads that flood our screens. They reap the profits from our private information — approximately $420 per year per Marylander — but have contributed nothing to support Maryland and help make the state better for its residents,” wrote the Maryland Fair Funding Coalition, which applauded the tax’s passage, in a statement.