It’s morning on January 24, 1848, and a sawmill operator notices some shiny flecks in the American River just downstream of his mill. The Gold Rush is on, and San Francisco explodes from a village of 200 to a boomtown of 36,000. The California legislature valiantly tries to squeeze some revenue out of the windfall with a short-lived $20/month foreign miners’ tax. Ironically, those making the most from the boom are the “shovel sellers” like Levi Strauss, making bank from outfitting the forty-niners. (You may be wearing a pair of his heavy cotton waist-high overalls right now!) And they all do it without paying a dime of income tax.
Nearly 200 years later, a new breed of San Francisco-area companies are mining a new form of gold. Except, instead of yellow metal, they’re digging for personal data. And state governments are still struggling to tax the boom. Two law school professors have just released a paper in the Notre Dame Law Review advocating one possible solution. Their answer: a digital service tax like the one recently adopted in Maryland.
Let’s say you’re fresh out of college and ready to start your first grownup job in Baltimore. You Google “business casual wardrobe” and see ads from a host of would-be outfitters. You click on an ad for Banana Republic, and 30 minutes later find yourself stuck in a rabbit hole learning about today’s “mall brand renaissance.” Weeks later, your email and general browsing are still full of Banana Republic ads stalking you like a jealous ex still lurking on your social media.
Taxing ad revenue is easy. But taxing search is a different matter. It’s a barter transaction, with no cash changing hands. Google gives you free search in exchange for personal data to feed into a creepy algorithm so it can charge advertisers higher prices. To make matters worse, Google sits in California, just a couple of hours’ drive from where James Marshall first discovered gold. Banana Republic sits in New York. And you, of course, are in Charm City. How does a thirsty Maryland government get a piece of the action between an out-of-state platform like Google and an in-state consumer like you?
In 2021, Maryland became the first state to impose a digital service tax. Platforms generating at least $100 million in global gross ad revenue, with at least $1 million attributable to Maryland, pay a tax of 2.5-10% of Maryland advertising sales revenue. The statute prohibits platforms from passing those taxes on to advertisers. What’s even better is that it’s not the Maryland resident paying the tax—it’s the out-of-state Big Tech platform that everyone loves to hate!
Of course, Big Tech isn’t taking the new tax lying down. Various players have filed suits in state and federal court, arguing that the new tax violated the federal commerce clause, the Internet Tax Freedom Act prohibits state and local governments from taxing online activity, and various due process requirements. Those challenges have failed, at least for now. However, given the high stakes and sheer number of parties, it’s likely to wind up in front of the Supreme Court. The only thing we know for sure is that a lot of lawyers are going to make a lot of money billing a lot of hours.
None of this will affect your pocket directly. But the indirect costs could drive up prices in general, despite Maryland’s best sleight-of-hand efforts to pawn the burden off on out-of-state platforms. As the search for revenue grows more intense, we can expect more states to jump on the new tax bandwagon. As always, count on us to help you sort it out!