Only a month after Maryland adopted a gross receipts tax on digital advertising revenues, the Maryland Senate, by a vote of 46-0, has passed a bill -- S.B. 787 – that would prohibit large online companies subject to the tax from directly passing on "the cost of the tax imposed … to a customer who purchases the digital advertising services by means of a separate fee, surcharge or line item." S.B. 787 also contains an exemption from the tax on digital advertising services for news media and television and radio broadcasting entities, although the exemption for news media entities would not be available to an entity that is “primarily an aggregator or republisher of third-party content.” The bill, which has now moved to consideration by Maryland’s House of Delegates, also would postpone the first year of the Maryland tax’s application for one year to tax years beginning after December 31, 2021, instead of tax years beginning after December 31, 2020.

In my post on February 14, 2021 (Maryland Adopts Digital Advertising Services Tax -- The Battle Begins), I noted that one of the arguments against Maryland’s passage of a digital advertising services tax was that the economic impact of the tax will be felt not by the advertising platform companies, but by the advertisers to which the economic burden of the tax will simply be passed along, and that the tax will disproportionately harm Maryland businesses, especially small businesses. While S.B. 787 clearly is a legislative attempt to address that argument, it remains to be seen whether and to what extent this attempt effectively responds to that argument.

Unfortunately, the legislative language is less than clear in several respects.  First, exactly what does “directly” mean when used in reference to passing on the cost of the tax? If Google, Facebook or Amazon does not enter into a contract directly with an advertiser (e.g., by entering into a contract with an intermediary such as an advertising agency), is the relief intended by this provision available? Similarly, if the cost of the tax is not explicitly evidenced by a “separate fee, surcharge or line item” separately stated on the invoice, but is otherwise embedded in the digital advertising service provider’s charges, is the prohibition on passing along the cost to the advertiser applicable? Future regulations could explain the application of these provisions and answer questions like these, but the vagueness of this legislation indicates that there may be multiple ways to avoid its application and that enforcement may be impractical.

As previously noted, Maryland’s new digital advertising services tax has already attracted several lawsuits challenging its legality on constitutional and other grounds. This latest effort to soften its bite may not only fail to achieve its stated purpose, but also may invite further scrutiny and legal challenge.