Eric Luedtke, a delegate from the Democratic State of Maryland, wants to tax big tech companies to help fund the state’s K-12 education.
And if other states follow suit, so be it.
“States tend to distance themselves from each other when making policies,” Luedtke said. “And a lot of times with that stuff, you’ll have a state that serves as a test case that goes to court and then, you know, if the courts say, ‘It’s okay,’ then you see other states start to do it. do too. “
This short OK is in the air. Maryland’s new tax, which the state legislature passed by overturning Republican Gov. Larry Hogan’s veto, establishes a duty on all digital advertising revenue for businesses with more than $ 100 million in advertising revenue around the world every year.
And while it is expected to begin next month, the law is the target of a lawsuit by big tech companies and industry groups who claim it violates the Internet Tax Freedom Act (ITFA), a law federal government law that prevents “state and local governments from taxing Internet access, or imposing multiple or discriminatory taxes on electronic commerce,” according to the Congressional Research Service.
How this lawsuit unfolds will have major implications for state efforts to raise taxes on tech companies. Even a loss could provide states with some sort of playbook on how to proceed.
“Maybe in the short term there will be problems with the tax,” said Lilian Faulhaber, a law professor at Georgetown University specializing in tax law. following Covid and because there is a demand from citizens to tax Big Tech, this could in fact push for some ITFA reforms.
When Congress passed the Internet Tax Freedom Act, the moratorium on taxing Internet access and e-commerce was supposed to last three years, but it was renewed eight times.
Groups representing state governments, including the National Governors Association, have called for increased state oversight to tax internet companies. In testimony before the Senate Committee on Commerce, Science and Transportation in 2007, the group’s director of federal relations called on Congress to “review the scope of the moratorium in light of technological advances” and update the law’s definitions “to ensure they reflect the intent of Congress and do not unnecessarily interfere with the state’s tax authority.”
The Maryland lawsuit, filed by the United States Chamber of Commerce and a coalition of industry and business groups including Amazon, Google and Facebook, alleges violations of Internet tax freedom law and clauses commerce and due process of the Constitution.
“At the end of the day, this is such bad tax policy and it’s illegal,” said Stephen Kranz, partner at McDermott Will & Emery and lawyer for Maryland Lawyers. “He will be defeated. It’s not a question of if, it’s a question of when.
But like other internet regulations passed in the 1990s, including the Communications Decency Act and its Section 230, which protects social media companies from lawsuits for user content posted on their platforms, the Internet tax freedom law is considered by some to be outdated.
“The original version was drafted and adopted in 1998, which, you know, the internet was a very different place back then,” Faulhaber said.
There are already states following Maryland’s lead. In Connecticut, a bill was introduced in the state legislature that would increase taxes on annual gross revenue from social media advertising in the state. A bill introduced in the previous session of the New York legislature would have imposed a sales tax on digital advertising.
Maryland’s victory in the lawsuit may hinge on a similar South Dakota case, which imposed a sales tax on businesses with gross sales income in the state greater than $ 100,000, even if the businesses were not not present in the state. In 2018, the Supreme Court upheld the law, allowing South Dakota to collect sales taxes from large out-of-state suppliers. The ruling overturned an earlier Supreme Court ruling that the judges said was no longer constitutional or enforceable, given the changing media landscape.
By the end of 2018, 31 states had imposed a sales tax on large out-of-state retailers.
Faulhaber said she expects the same avalanche of state legislation if Maryland’s digital advertising tax is found to be constitutional.
“If Maryland’s tax goes ahead, many more states will follow,” she said. “Even if a business doesn’t have a lot of on-the-fly income in Maryland, they can still object because they’re concerned they may have a lot of on-the-fly income in other states.”
Maryland Senate Speaker Bill Ferguson, a Democrat and the state’s top champion for the new tax, said he was confident in the legality of the new law.
Businesses make money from digital advertising in Maryland, and the Constitution allows states to regulate business within their borders, he said.
“I find it quite disturbing that the suggestion is made that states do not have the right to regulate the activities of businesses that take place within state borders,” he said. “I don’t think that’s how our Constitution was established, and I would suggest that anyone who argues otherwise, you know, should really think carefully about what that means about their belief in our constitutional system of government.