Proposed Md. internet advertising tax lauded, called unconstitutional

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ANNAPOLIS — A tax on internet advertising, the first of its kind in the nation, could raise $250 million annually in Maryland provided lawmakers can navigate what opponents said are a number of thorny constitutional issues.

The bill proposed by Senate President Emeritus Thomas V. Mike Miller Jr. and his successor, Senate President William “Bill” Ferguson, would establish a new tax on some of the largest internet companies in the world. The bill is one of a number lawmakers are considering as they grapple with how to pay for a $4 billion annual plan meant to overhaul public education without directly taxing state residents through increases in sales, income or property taxes.

“This is an initiative that is new to the United States,” said Miller. “It’s bold. It’s innovative.”

Opponents describe the bill as unconstitutional.

“We can’t just tax digital,” said Sen. Andrew Serafini, D-Washington. “Constitutionally we’re going to have to expand it to print. We have Maryland law. It’s been tried before. We can’t do that.”

In 1958, the Maryland Court of Appeals struck down a Baltimore law that imposed a 4% tax on radio, television and newspaper advertising as a violation of the First Amendment.

Currently, only two countries — France and Hungary — have implemented such a tax. Several of other European countries are contemplating similar levies.

“Right now, as it’s written, this bill is a choose your own adventure story premised on a thought experiment in a New York Times op-ed,” said Matt McDermott, president of the American Advertising Federation of Baltimore.

Under the new proposal, businesses would pay between a tax of between 2.5 and 10 percent based on gross revenues. Businesses with a global gross revenues of $100 million to $1 billion would pay 2.5 percent. The top rate of 10 percent would be assessed on businesses with annual gross revenues in excess of $15 billion.

The proposal could generate an estimated $250 million annually. Ferguson said that amount would likely come from as many as a dozen companies including Google and other major digital companies.

Supporters acknowledge that the bill will need to be refined and likely expanded to include non-internet forms of advertising.

Legislative policy analysts warn that the proposal, if enacted, could face constitutional challenges, including those based on violations of the First Amendment and the Commerce Clause as well as the federal Internet Tax Freedom Act.

Vans Stevenson, senior vice president for the Motion Picture Association, called the tax discriminatory.

“It raises constitutional issues, particularly because it’s singling out protected speech namely advertising,” said Stevenson.

The idea has the support of economist and Nobel economics laureate Paul Romer, who in a 2019 New York Times column wrote that such a tax on companies like Facebook and Google would force them to change their business practices. It would also crimp their current business practices, which have seen them become “a haven for dangerous misinformation and hate speech that has undermined trust in democratic institutions,” he wrote.

Speaking to the Senate Budget and Taxation Committee Wednesday, Romer said the Miller and Ferguson proposal “is not a tax on digital services. This tax is targeted at a very corrosive and I think very dangerous business model.”

Romer said he hoped the tax would ultimately force bad corporate actors to change their ways or get out of the market.

“I’d be happy if this tax raised no revenue. The sponsors wouldn’t,” he said.

If passed, the Office of the Comptroller would set aside monies each quarter to pay the costs of administering the new law. The balance would be earmarked to pay for the Kirwan Commission’s proposed education policies. The costs of the Kirwan proposals, once fully implemented over 10 years, are estimated to be $4 billion annually.

Ferguson said the proposal is meant to bring the state’s economy into the internet age, much as a 2018 U.S. Supreme Court ruling has opened the door to states collecting sales taxes from online vendors who sell to Maryland residents.

“This is the new economy. Someone has to lead, and Maryland should be that leader,” Ferguson said.