This video, produced on February 11, 2021, provides a discussion on current states’ digital tax initiatives that may have an impact on agencies, and how agencies should begin to prepare for them.

Please feel free to contact either Alison Pepper, 4A’s, EVP – Government Relations, or Sal Conte, 4A’s, VP – Business Intelligence & Insight Practice Group for additional information or questions.

4A’s Post-Production Update:

As this is the first tax of its kind, there are obviously a lot of questions with unclear answers.

We are adding these few additonal thoughts from 4A’s:

• Since the bill was first passed last year, it’s been very unclear if agencies were even going to be covered in the bill’s definition of “seller.” It didn’t appear that agencies were covered by the plain language of the bill text, but again, unclear due to the vagueness of the definition. 4A’s Alison Peprer recently posed that question to a WSJ reporter who asked her about the bill, who followed-up on it with the bill’s sponsor. You can read more here, but it’s a pretty encouraging response from the bill’s sponsor that he doesn’t consider much of what agencies do to be considered under the definition of seller, and agencies are clearly not the intent of the tax. It’s not dispositive however, as this bill is still going to go to the Maryland comptroller for implementation guidance for companies, but it’s a really good sign that agencies are not the target of this tax.
• There’s still the issue of “sellers” passing the tax downstream to agencies and others if they can – there is currently a new piece of legislation in Maryland that would prevent sellers from passing the tax downstream, but it has some loopholes that could allow downstream passage of the tax, albeit in an “indirect” way.
• In Maryland, vetoes that are overridden go into effect in 30 days.
• There is still a lot of ambiguity about how Maryland is going to collect this tax. They appear to have settled into a kind of apportionment fraction idea, with the numerator being digital revenues with nexus to Maryland. The problem is that Maryland doesn’t really know what that means – they’ve floated the idea of using IP addresses, but that approach has obvious problems. While IP addresses are geographic indicators, they’re frequently not indicative of where activity is actually taking place, particularly with the rise of proxy servers. So Maryland could be really over accounting or under accounting activity by relying on IP addresses – and going deeper than IP addresses raises obvious privacy problems. It appears that Maryland doesn’t know how they’re going to do this.
• This could all be a moot point as the U.S. Chamber of Commerce and others have filed a lawsuit against Maryland this week disputing the tax on multiple grounds, including violation of the Permanent Internet Tax Freedom Act. The case was filed in federal court in Maryland and will start working its way through the system. Depending on appeals, it could take years. However, should Maryland lose in trial court, they might have an incentive to cut their losses early for various reasons.