On 12 February 2021, Maryland’s General Assembly enacted two bills over the veto of Gov. Larry Hogan that make major changes in the state’s tax code. One is a sales tax on digital products and the other is a digital advertising tax.
The first bill, H.B. 932, expands the existing sales and use tax base to include “digital products,” effective 14 March 2021. The second bill, H.B. 732, establishes a new digital advertising gross revenue tax — the first in any state. The effective date subsequently was delayed from 2021 until 2022. The digital advertising tax applies to annual gross revenue derived from digital advertising in Maryland and is imposed at scaled rates between 2.5% and 10%.
The two bills reflect separate and distinct trends in state taxation of the digital economy, and each raises significant compliance issues for businesses. While the sales tax on digital products reflects a continuing trend of state consumption tax base expansion in the digital arena, Maryland’s interpretation of a “digital good” may be viewed as one of the most extensive iterations of such base expansion efforts in recent years. Additionally, the digital advertising tax is a new state gross revenue tax regime that seems to follow foreign digital service taxes (DSTs) enacted to address perceived shortcomings in international corporate income tax rules.