Digital Advertising Gross Revenue Tax: Are You Prepared?

On February 12^th, Maryland became the first state to pass a tax on digital advertising services.  Known as House Bill 732, the bill will take effect March 12^th, 2021 and will apply retroactively beginning after December 31, 2020.

The “Digital Advertising Gross Revenue Tax”, also known as DAGRT, will impose a tax on gross revenue derived from digital advertising services in the state of Maryland. Under this bill, “digital advertising services” are defined as “advertisement services on a digital interface, including advertisements in the form of banner advertisements, search engine advertising, interstitial advertising, and other comparable advertising services.”¹

Even though Maryland is the first state to enact a tax on digital advertising services, other states are investigating how they can also leverage digital advertising and use it as a potential revenue stream for the state.  For example, Connecticut, Indiana, and New York have proposed similar bills.  The District of Columbia, Washington state, West Virginia, Montana, and Nebraska are also considering a digital advertising tax.  With COVID-19 ravaging states financially, and leading to increased social benefits and stimuli, states are hard pressed to find a solution and are likely to follow Maryland’s footsteps. The reallocation of state government budgets towards combating health and economic concerns has led to a current situation of state authorities focusing on large technology companies, that have grown tremendously during this pandemic, to help manage budgetary shortfalls.  Estimates indicate that DAGRT can generate up to $250 million in revenue for Maryland within its first year.²

Does DAGRT apply to you?

The language in the bill leaves confusion as to which party or parties may be subject to the tax.  Maryland’s proposed digital advertising tax is vague on many definitions, and is bound to create uncertainty about where revenue is sourced and who is subject to the tax. Additionally calculating the tax from cross border and internationally generated revenue will become complex and difficult to enforce. The ambiguity in the legislation’s language can potentially lead to double taxation, as entities may end up paying taxes on gross receipts from the same ad being served to a viewer. 

Are you prepared for DAGRT?

DAGRT can be quite costly for your company, and is incentivizing providers of digital advertising to explore new avenues of conducting business to avoid the tax.  One example of a solution is a company implementing advertisement-free subscription options. 

NMS Consulting works with you and your team to identify solutions to minimize or avoid DAGRT.  To help you navigate the complexities with DAGRT, NMS Consulting is committed to delivering high-quality services and insights to you by finding solutions in a collaborative, innovative, and transparent way.

Our support will provide you with first-hand knowledge, enhanced efficiency, customized solutions, increased confidence, and reduced risk.  We deliver deep knowledge of tax requirements, along with a breadth of experience in applying our know-how worldwide.  Our practical tax advice, combined with our tax compliance framework, gives you confidence that a structured approach is followed.  We help make tax management straightforward, and provide oversight while using global visibility for making strategic decisions.  Whether you have a domestic business or a multi-national corporation, complying with a likely increasing number of tax rules for digital advertising will be time consuming and costly.  As your business expands operations into new markets, managing such tax risks becomes more complex, and we will help ensure compliance with reporting requirements and determine if it would be possible to be exempt from DAGRT.  We offer cost-effective tax consulting services, along with a suite of integrated tax technologies, that will help you achieve your goals.

Sources:

[1] https://www.stateandlocaltax.com/digital-economy/marylands-proposed-digital-advertising-tax-hb-732-insights-and-analysis/

[2] https://www.crowell.com/NewsEvents/AlertsNewsletters/all/Marylands-Digital-Advertising-Tax-A-Contentious-Start-and-an-Uncertain-Future/pdf