On April 12, 2021, Maryland legislators passed Senate Bill 787, which proposed several significant amendments to Maryland’s digital ad tax (see Maryland Passes Digital Advertising Gross Revenues Tax After Overriding Veto).  Governor Larry Hogan declined to take action with respect to signing or vetoing Senate Bill 787.  As a result, the legislation automatically became law, effective May 12, 2021.

Most notably, Senate Bill 787 delays the effective date of the digital advertising tax to tax years beginning after December 31, 2021 and prohibits taxpayers from “directly pass[ing] on the cost of the tax… to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.”   

We believe Maryland’s pass-through prohibition could be subject to several challenges.  First, Maryland’s position could be subject to challenge as discriminating against interstate commerce in violation of the Dormant Commerce Clause by shifting the burden of the tax to out-of-state customers.  Furthermore, Maryland’s prohibition on the separate statement of the tax on customer invoices could present a constitutional challenge on First Amendment grounds.  There are additional potential constitutional concerns with Senate Bill 787, related to the Contract Clause, Equal Protection Clause, and Due Process Clause.  There is also an argument that challenges to the pass-through provision are not prohibited by the Tax Injunction Act, as the prohibition relates not to the tax itself, but how the tax is billed and charged.

The legislation also narrows the definition of “digital advertising services” by excluding “advertisement services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity.” 

Senate Bill 787 also amends Maryland’s state sales and use tax to clarify that the recently enacted definition of taxable “digital products” specifically excludes certain online training and educational content as well as “professional service[s] obtained electronically or delivered through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.”  Significantly, this exclusion should override the Maryland Comptroller’s previously articulated position that the tax on digital products applied broadly to sales of software as a service (“SaaS”) and certain services involving access to online content. 

The taxability of online services and SaaS has been a nationwide issue, with many states often taking a position, similar to the position previously articulated by the Maryland Comptroller, that such services are taxable as software or a digital product.  However, to the extent the true object or primary purpose of a transaction is the sale or receipt of an otherwise non-taxable service, the mere use of software or other digital products in delivering that non-taxable service should not control the taxability, particularly when customers lack the requisite degree of use or control over any software or digital products to rise to the level of a taxable sale or license. 

We will continue to keep you updated on SALT Savvy regarding digital tax updates around the country.

Contact the Authors: Maria Eberle, Lindsay LaCava, Mark Yopp