Several states continue to move forward with the taxation of digital advertising and new tax proposals have entered the fray. We last updated you on the attempts by Maryland, Nebraska, and New York. Nebraska had a hearing on its sales tax bill in February, with relatively little movement after that. In contrast, Maryland and New York have continued their move towards imposing taxes on digital advertising in some form and West Virginia has entered the mix.
On March 18, the last day of Maryland’s legislative session (which adjourned early due to the coronavirus pandemic), the Maryland General Assembly passed a bill that includes the Digital Advertising Gross Revenues Tax. The tax, as passed, was amended slightly since our last blog. One of the most important amendments was a provision that applies an apportionment factor to a person’s annual gross revenues from digital advertising services to compute the assessable tax base, with the numerator being the annual gross revenue derived from digital advertising services in the state and the denominator the annual gross revenue derived from digital advertising services in the U.S. Use of U.S. revenues in the denominator of the apportionment fraction for purposes of apportioning global advertising revenues is concerning and raises constitutional fair apportionment concerns. Moreover, the Comptroller is given authority to adopt regulations to determine the state from which the revenues are derived. The bill is now sitting on Governor Hogan’s desk, and the Governor had previously indicated that he would veto the bill.
Although New York Assembly Bill 9112 has not progressed forward (which would have imposed a five percent seemingly unapportioned gross income tax on every corporation that derives income from the data New Yorkers shared with that corporation), on March 13, Senate Bill 8056 was introduced. Senate Bill 8056 is similar to the Maryland bill and would create a new article under which a tax would be imposed on annual gross revenues from digital advertising. For this purpose, digital advertising only includes advertising through a digital interface. The New York bill also has escalating rates based on the amount of global advertising revenue similar to the Maryland bill (2.5% for $100 million through $1 billion, 5% for more than $1 billion through $15 billion, and 10% for more than $15 billion). Like the revised Maryland proposal, the tax is apportioned based on revenues from the state, and, also like Maryland, the authority to determine the sourcing is delegated to the Commissioner to implement by regulation. One of the few differences is that the New York bill would limit the definition of digital advertising to advertising services that use personal information about the recipients of the ads. However, personal information is not defined in the bill.
On February 11, House Bill 4898 was introduced in West Virginia. House Bill 4898 would impose “a general data mining service tax.” As described in the bill, “Data mining essentially extracts information database users were not aware of and presents it in actionable format. It predicts customer behavior and, applied properly through campaign management software using advanced statistical, numerical and multivariate techniques, can directly target consumers on an individual basis.” The bill would require “commercial data operators” generating revenue from the use, collection, processing, sale, or sharing of West Virginian citizens’ user data to pay the tax at the rate of one cent per dollar of value of user data. The Commissioner would have the authority to develop the method to calculate the value of user data in consultation with “appropriate standards setting organizations.”
A commercial data operator is “an entity acting in its capacity as a consumer online services provider or data broker that: (A) generates a material amount of revenue from the use, collection, processing, sale, or sharing of the user data; and (B) Has more than 10,000 unique monthly visitors or users in West Virginia for a majority of months during the previous one-year period.” “User data” is defined as “any information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked with an individual user, whether directly submitted to the commercial data operator by the user or derived from the observed activity of the user by the commercial data operator.” The bill would also require each commercial data operator to provide information to the Commissioner no less often than every ninety days, including an assessment of “the economic value that the commercial data operator places on the data of its users,” along with identifying the types of data it collects from users and the ways that data is used.
Like the other proposals that we have seen, the West Virginia bill suffers from many infirmities. For example, how does one determine who is a West Virginia citizen? Based on tax status? Voter registration? Something else? Additionally, leaving the determination of “value” vaguely in the hands of the Commissioner will create serious issues.
While it is unclear what traction these bills will have given the uncertainty in the economy and the world right now, these bills clearly have significant issues. In addition to the potential Commerce Clause, ITFA, and Due Process Clause issues discussed in our prior post, the delegation of the sourcing authority to the respective revenue authorities is quite troubling, particularly because the proposals do not contain any guidance or parameters in effectuating the legislative intent.
The landscape of state and local tax was changing before the coronavirus pandemic, and will continue to change significantly. As states inevitably need more revenue, they may continue to turn to untaxed sectors of the economy such as digital advertising.