Is digital advertising really paying its due?

Maryland’s tax on digital advertising might be well-intended, but it could set a dangerous precedent.

On its face, Maryland’s digital advertising tax may have been welcome news to anyone in the industry that doesn’t work for a company that rhymes with Poogle and Basebook.

The Digital Advertising Gross Revenue Tax, which went into effect on Feb. 12, is a first-of-its-kind levy on businesses that make money from selling digital advertising that is displayed to residents of a particular state.

The tax is designed to pack a punch for tech giants, starting at 2.5% for businesses that make between $100 million to $1 billion in global revenue annually and shooting up to 10% for companies with gross annual revenue of $1 billion or more.

On paper, the logic makes sense: tax the rich and redirect the funds to plug spending gaps on state needs during the pandemic, including public education. Maryland’s government estimates the tax could generate $250 million in its first year alone.

As Maryland Democratic senator and chief proponent of the tax, Bill Ferguson, put it in a Facebook post: "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."

Makes sense, right?

But, like in many attempts to regulate Big Tech, Maryland’s tax might end up doing more harm than good to the consumers and small businesses it's trying to protect.

A week after the tax passed, lobbyists representing Facebook, Amazon and Google unsurprisingly posed a legal challenge to it, arguing it is unconstitutional under the Internet Tax Freedom Act, which puts a federal moratorium on internet taxes.

But a more philosophical and less technical part of their argument — that a digital ad tax could hurt small businesses and consumers the most — has a point.

Companies that sell ads, or facilitate ad sales, will likely pass the costs of the tax on to their customers, small businesses, who will pass it on to their customers: the citizens of Maryland. That’s not great in a state suffering from 6.3% unemployment.

The tax could also make it difficult for small businesses, which are reliant on digital advertising to stay afloat during the pandemic, bear the brunt of the costs if they can’t pass them along to consumers.

And there are consequences for local publishers, which are often owned by larger media conglomerates that make more than $100 million per year in gross revenues globally.

This is why Maryland Governor Gary Hogan vetoed the tax when it was first introduced last year. “With our state in the midst of a global pandemic and economic crash, and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now," he said.

Recent regulatory history shows he has a point. GDPR in Europe, CCPA in California and the death of third-party cookies have only pushed advertisers toward Big Tech, with its reams of consented, opted-in, first-party data. Just look at their recent earnings reports.

Taxes on tech giants levied by the EU government and Maryland’s new digital ad tax is encouraging other state legislatures in New York, Montana, Oregon, Connecticut, Nebraska, and Indiana to consider similar provisions.

But while Big Tech needs to be reined in, and posing a tax on digital advertising may seem like an elegant solution for that, it’s worth diving into the gritty details to create a solution that does have a positive outcome for small businesses, local publishers and consumers.

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