Rhode Island Enters the Fray, Proposes Second in the Nation Digital Advertising Tax

On February 6, 2025, Rhode Island lawmakers heard testimony about Rhode Island Governor Daniel McKee’s proposed Digital Advertising Gross Revenue Tax (“RI Ad Tax”).  If enacted, the RI Ad Tax, which is included in Governor McKee’s proposed 2026 budget released last month (HB 5076), would be the second of its kind in the U.S. after Maryland’s digital advertising tax.  Maryland’s digital advertising tax has been embroiled in litigation since its enactment and we expect the RI Ad Tax to face similar legal challenges if enacted.

As proposed, the RI Ad Tax would be effective for tax years starting on or after January 1, 2026 and apply to taxpayers with over $1 billion in annual gross revenue.  These taxpayers would be subject to a 10% tax on their “annual gross revenue derived from digital advertising services in Rhode Island.”  “Digital advertising services” include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”  The tax base is computed by multiplying the taxpayer’s annual gross receipts derived from digital advertising by a fraction, the numerator of which is the number of devices “accessing the advertising in Rhode Island,” and the denominator of which is the total number of devices accessing the advertising.  The RI Ad Tax prohibits taxpayers from passing on the cost of the tax to customers.  Governor McKee has stated publicly that the RI Ad Tax is intended to target large companies in the technology sector.  Consistent with that intent, Governor McKee submitted an amendment to HB 5076 on February 3 to exempt media and broadcast entities from the tax.

The RI Ad Tax is patterned after Maryland’s digital advertising tax, which was enacted on February 12, 2021 and has been the subject of protracted litigation ever since.  The Maryland digital advertising tax has been challenged in both state and federal court.  Taxpayers successfully challenged the Maryland tax in Maryland Circuit Court, but the Maryland Supreme Court vacated that ruling on procedural grounds without addressing the substantive arguments concerning the validity of the tax.  Four cases involving substantive challenges to the tax are now pending before the Maryland Tax Court (Peacock TV LLC v. Comptroller, Apple Inc. v. Comptroller, Google LLC v. Comptroller, and Meta Platforms Inc. v. Comptroller).  At the federal level, there is a case currently pending before the United States Court of Appeals for the Fourth Circuit on the issue of whether the prohibition on passing the cost of the tax on to customers violates the First Amendment of the U.S. Constitution.  See our prior coverage of Maryland’s Digital Advertising Tax here, here, here, and here.  While the RI Ad Tax differs from the Maryland tax in some respects—for example, it imposes a flat rate, whereas the Maryland tax employs a graduated rate structure based on global gross receipts—these differences should not completely insulate the RI Ad Tax from the types of challenges that taxpayers have brought against the Maryland digital advertising tax under the Internet Tax Freedom Act and U.S. Constitution.

We anticipate numerous challenges to the RI Ad Tax if enacted, including challenges based on the same Internet Tax Freedom Act, First Amendment, Due Process, and Commerce Clause principles that formed the basis for the challenges against the Maryland digital advertising tax.  In addition, the RI Ad Tax’s vague apportionment provision lacks critical details about how taxpayers should determine the number of devices within Rhode Island that access a given advertisement.  This provision seems to have been proposed without regard to whether taxpayers even have the data or capability to make such a determination, raising potential compliance issues and serious Due Process concerns.  Opposition to Governor McKee’s proposal has been swift, as was expected.  On February 6, 2025, Rhode Island lawmakers on the Senate Committee on Finance heard testimony in response to Governor McKee’s proposal.  Questions about the legality of the RI Ad Tax, as well as the potential fallout from Maryland-style legal challenges, were front and center during the hearing.  We will be closely watching Governor McKee’s proposal as the legislative session unfolds.  It may take some time for taxpayers to receive meaningful answers to questions concerning the validity of these types of taxes; discovery in the four cases contesting the Maryland digital advertising tax that are pending before the Maryland Tax Court is permitted until June 20, 2025 and evidentiary hearings are scheduled to begin on July 21, 2025.

Contact the Authors: Maria Eberle, Lindsay LaCava, Michael Tedesco and Basile Manikas