Maryland’s Proposed Digital Tax May Be Unconstitutional
Last week, a Maryland state senator introduced a bill to tax revenue from digital ads shown to Marylanders. Proceeds of the tax would fund education, but the bill may have been celebrated not only by educators and parents in Maryland, but also by government officials in Paris, because it undermines efforts by the Treasury Department and Congress to persuade France that its own digital tax not only discriminates against U.S. companies, but also represents bad policy.
The proposed Maryland tax also may violate the federal Internet Tax Freedom Act. This federal law prohibits “multiple or discriminatory taxes on electronic commerce,” and it could be read to prevent Maryland from imposing more or higher taxes on digital ads than ads delivered through other mediums, such as print, radio, or television.
But that’s the least of the bill’s potential legal troubles. Because the proposed tax would only apply to companies with global revenues of at least $100 million, and because the tax increases for companies in the highest gross revenue band described in the bill, the tax may discriminate because it would mainly apply to non-Maryland and foreign companies. Given the high revenue thresholds in the Act, it is likely that few Maryland companies will be liable for digital tax at all, and probably no Maryland companies will pay the tax at the higher graduated rates that apply to companies with revenue over $1 billion. The tax doubles for companies with global revenues over $1 billion, and the tax rate quintuples for companies with $15 billion in revenues. This impact — disproportionately taxing out-of-state and foreign companies — may unconstitutionally discriminate against interstate and international commerce. For over 200 years, the Supreme Court has interpreted the Commerce Clause of the Constitution to prevent states from enacting what are essentially tariffs on interstate and international commerce.
Even if the law does not unconstitutionally discriminate against cross-border commerce, it could still face a constitutional challenge because it interferes with the federal government’s ability to “speak with one voice when regulating commercial relations with foreign governments.” This doctrine, which arises from the Constitution’s assignment to Congress, not the states, of the power to regulate interstate and international commerce, says that states cannot enact policies that undermine the goals of the federal government in international relations.
The federal government could not be clearer that it opposes digital taxes of the type Maryland proposed when enacted by other countries. Not only does the Permanent Internet Tax Freedom Act set as an “objective” for international relations that electronic commerce should be free from tariffs and discriminatory tax, but the Treasury Department has been locked in an increasingly heated dispute with France over the French digital tax. Secretary of the Treasury Steven Mnuchin and bipartisan groups of Congress have complained that other countries’ digital taxes discriminate against U.S. companies and double tax them. For example, like the proposed Maryland tax, the French tax has high revenue thresholds that effectively exclude French companies from the tax. Indeed, a U.S. Trade Representative investigation recently concluded that the French tax was discriminatory and justified imposing retaliatory tariffs on French goods.
Disputes about the French tax not only suggest that the similar Maryland tax discriminates, but they also confirm that the federal government staunchly opposes digital taxes. The United States has consistently tried to persuade France to repeal its digital tax. But why should France repeal its digital tax if Maryland has one? Maryland’s digital tax proposal undermines the United States on the world stage, thus preventing the federal government from “speaking with one voice” on digital taxation. The federal government says that digital taxes are bad policy and discriminatory, while Maryland is saying something different.
Maryland needs tax revenue for education, and digital behemoths headquartered on the West Coast or abroad may seem like rich targets for taxation. But the Constitution prohibits states from exporting tax burdens to outsiders. Marylanders should take note that the typical remedy for an unconstitutional tax is that the state refunds it. None of this means that Maryland cannot tax advertising targeted to Marylanders. A broad-based tax on advertisements that was not limited to digital ads and that fell on Maryland and non-Maryland companies alike would comport with federal law and the Constitution. But a discriminatory tax that seeks to tap the revenues of large companies outside of Maryland is likely to backfire, wasting the Maryland legislature’s time and efforts on a vain quest for easy money.
