Various US states reintroducing legislation on taxation of the digital economy

March 5, 2021

Several US states have proposed 2021 legislation for the taxation of the digital economy, including taxes on digital advertising services, social media providers and the sale of personal data.

 

Last week, the State of Maryland created the first digital advertising tax in the US, voting to implement a gross revenues tax on digital advertising services. On February 11, the House of Delegates voted to override the Governor of Maryland’s veto of House Bill 732, and the State Senate completed the vote and enacted the Bill on February 12.

The Bill, which applies for taxable years beginning on or after January 1, 2021, imposes a tax on a taxpayer’s annual gross revenue derived from digital advertising services in Maryland. The rate starts at 2.5 percent for taxpayers with USD100 million of global revenue and rises to 10 percent for those with an excess of USD15 billion of global revenue.

According to law firm Baker McKenzie, challenges to the Bill are anticipated: “The tax’s definition of “digital advertising services” is vague and potentially runs afoul of the Internet Tax Freedom Act’s prohibition on taxes that discriminate against electronic commerce. Moreover, the bill’s reliance on global revenues to determine the tax rates and use of U.S. revenues in the apportionment factor denominator may raise Due Process Clause and Commerce Clause concerns.”

However, the firm also notes that the state’s move may “open the floodgates” to similar tax proposals.

Various Bills and proposals are already currently under consideration. Connecticut is proposing to establish a 10 percent tax on the annual gross revenues derived from digital advertising services in the state for businesses annual global gross revenues exceeding USD10 billion, as well as a tax on social media provider companies on the apportioned annual gross revenue derived from advertising services in the state.

Montana’s House Bill No. 363 also seeks to impose a 10 percent tax on gross revenue derived from digital advertising services in the state where the provider has a global revenue of USD25 million or more.

New York has reintroduced digital advertising tax proposals from 2020, including gross receipts and sales tax proposals, as well as its proposal to impose a 5 percent tax on gross income on companies deriving income from the data that individuals in the state share with them. Similarly, Oregon and Washington legislators have proposed taxes on income derived from the sale or monetization of personal data in that state.

Meanwhile, Indiana has proposed House Bill No. 1312 and House Bill No. 1572, both of which would impose taxation and fees on social media companies that have more than 1 million active account holders in the state.

While the US government has previously argued against international taxation of the digital economy, at the end of January 2021 the newly instated Biden administration indicated it would rejoin the global conversation on digital services taxation. The government committed to “re-engage actively in the ongoing OECD discussions on international taxation to forge a timely international accord,” according to a press release from the Department of the Treasury.