This memo is reprinted here with permission. ITEP did not contribute to the authorship of this article.
Introduction
This short memo relates to a recent decision of the Maryland tax court striking down Maryland’s digital advertising tax.
I was not involved in drafting the tax nor in the case to defend it, but I have argued that it should be upheld and so the decision is disappointing. In the press, opponents of the tax have enjoyed chortling about how this decision will undermine similar efforts around the country. And of course they say that, but I do not think that it is likely true. As a matter of law, this opinion will only matter in other states if it is persuasive on matters at issue in those states. (It will not even matter in Maryland if it does not persuade higher courts.).
However, this opinion hardly addresses, much less persuasively, the main issues raised by Maryland’s tax, much less the taxes being challenged in Illinois, Utah or Washington.
In this short memo, I will explain why I think this is so by providing my initial abbreviated analysis of the Maryland decision, subject to later revision and expansion.
Basics
Before getting into the weeds, I wanted to reiterate the positive case for this tax in short and a few other background matters.
Policy: Taxes like that in Maryland have been successfully imposed all over the world. There are many reasons for the imposition and the success. I will focus on one of each. First, these taxes are generally imposed on taxpayers that are not otherwise paying a reasonable share of tax on their extraordinary profits. Second, these taxes have a relatively simple design and so are harder to game than standard income taxes.
Law: The states are the frontline providers of most government services and generally have the sovereign power to raise taxes to pay for the services their citizens want. Properly understood, federal law plays a very narrow role.
Procedure: This decision will likely be appealed to a higher court in Maryland and so is not even the final word in Maryland. Higher courts in Maryland, as a matter of law, will not accord it much deference. This decision is in any event not the law in any way in any other state. Other state courts will consider this decision important to the extent they find it persuasive and I don’t believe they will.
Stakes: The opponents of reasonable taxation will always have more resources. They can stretch federal statutes beyond the bounds of sense and can resurrect long-dead federal doctrines if it prevents their clients from paying even a small amount more tax, as has happened here. If their bluster, and in this case, bamboozlement of one judge, is allowed to define the limits of state tax policy, there will not be much room left to finance even minimal state governments. It is not as if these taxpayers are on board with the status quo, as many of the same taxpayers, law firms and advocacy groups are manufacturing preposterous arguments against old taxes as well. There is, sadly, little choice but to fight.
Legal Analysis
The tax court decision is full of errors. I cannot summarize them all and so I will focus on a few particularly relevant and spectacular fails. The key takeaway is that this decision either does not address key issues that will matter in other states or does so in such a poor way that the opinion should be viewed as at most a speed bump.
- “Similarity”: The court found there was discrimination against digital ads because digital and non-digital ads were “similar” and only digital ads are taxed. Specifically, the court found that all ads had the same purpose – “to have the public do something.” Among the many things wrong with this analysis and definition (is this memo an ad?), it misses the basic fact that many digital ads are really about collecting information, not persuasion at all. The opinion does not address this. To see how confused the judge was, consider that the decision proudly indicates that the judge thought horses and race cars were relevantly similar, presumably because they can both have the purpose to take someone somewhere. But as a legal analysis this is silly. Horses are not allowed on public highways and one only pays a vehicle license fee on cars (and different fees, sometimes, relating to horses) – and
this makes sense, relating to horses) – and this makes sense, because these things are relevantly different in the context of the law. - Targeted ads: Maryland interpreted its statute, quite reasonably, as only applying to targeted (programmatic) ads – that is ads that automatically appear before certain users and gather information about them. This approach to the tax base makes the difference between digital and non-digital ads very clear (hence no discrimination), even clearer than the difference between horses and racecars (do ads in a newspaper track your habits in real time?). Also, targeted ads can appear on any medium, not just the internet, and so there is no discrimination against the internet. What does the tax court opinion say about such analysis? Nothing.
- Discrimination generally: The tax court takes the position that Maryland discriminated against out-of-state interests because there was no large platform selling digital ads based in Maryland. This position falls apart upon inspection. Can states not tax large industries with economies of scale not based in their state? Can California not tax tobacco? The answer is clear, and, as usual, the court did not address this question and just pronounced that there was discrimination.
Final thoughts on the upshot of this decision
- Do not give up because a battalion of lawyers confused one judge.
- Do consider policy expedients that adjust the tax base/context that could be both good policy and helpful legally at the margins. Such expedients are not legally necessary, only potentially helpful. For example, the base of the tax can be narrowed to targeted ads (as in Maryland, Utah and Illinois). Or, there could be the reasonable extension of an existing tax (as in Washington or proposed in Pennsylvania) or the tax can be applied to a wider range of advertising (as in New Mexico) or a wider range of data collection (see a model here).
- Avoid reasonable and defensible, but unnecessary, policy choices that are lawsuit clickbait, such as passthrough prohibitions and worldwide thresholds.
Conclusion
Judges are people and that is why we have appeals and, in our federal system, multiple parallel judicial systems. The judge in this case was diligent but ended up all spun around, maybe because of his diligence. Higher courts and courts in other states are not obliged to follow this ruling unless it is persuasive. It is not persuasive and so they probably will not.
