Maryland’s Digital Advertising Tax Is Distortionary Discrimination That Will Harm Local Businesses and Consumers, Says ITIF

WASHINGTON—With Maryland state lawmakers set to override a veto from Gov. Larry Hogan to create a state tax on digital advertising, the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, released the following statement from ITIF President Robert D. Atkinson:

Digital services taxes are a bad idea whose time should never come. The arguments that proponents make to justify proposals like the one Maryland’s legislature wants to enact defy logic. They are essentially claiming that large Internet platforms—and by extension e-commerce itself—harm consumers and society as a whole when in fact they are demonstrably beneficial for the economy.

The simple fact is that taxing digital advertising is discriminatory. Why not tax highway billboards, TV ads, or newspaper ads? The obvious answer is that lawmakers want to grab revenue from out-of-state firms in an ill-advised, distortionary attempt to shore up state tax coffers at the expense of local businesses that advertise on the Internet. This almost certainly runs afoul of the Permanent Internet Tax Freedom Act, the federal law that prohibits discriminatory taxes on e-commerce.

In fact, taxing advertising itself is discriminatory. We have had a long and widely accepted state tax system. States can tax sales of goods and services, and they can tax business revenues, but they don’t tax intermediaray activities. Doing so would hurt small businesses in Maryland and any other jurisdiction that follows its lead, because big Internet platforms will pass on their costs—so the mom-and-pop businesses that lawmakers are trying to help will end up paying more to reach customers online.

Remember that digital companies already pay taxes in the states where they have facilities. California may get a lot of those taxes, but that’s because many of the Internet companies that would be targeted with this digital advertising tax are located there. Going down the path of trying to tip the scales will end up raising costs for Maryland businesses and underminening the digital economy.

European governments have already started making these kinds of grabs from U.S. taxpapers. It will be to their citizens’ detriment. Lawmakers in the United States should see it as a cautionary tale, not a model to emulate.