A coalition of tech industry organizations have sued the state of Maryland to block a first-of-its-kind tax that they called a “punitive assault” on digital advertising.

The tax imposes a charge on the annual gross revenue from digital advertising services provided in Maryland. The state’s House of Delegates passed it in January, overriding the veto of Gov. Larry Hogan.

According to groups including the Computer & Communications Industry Association and the Internet Association, the levy is illegal under a federal internet tax moratorium and unconstitutionally burdens and penalizes “purely out-of-state conduct.”

“Maryland lawmakers disapprove of large digital advertising companies and intended to penalize them,” the groups said in the complaint, which seeks a court order enjoining enforcement of the tax.

The Wall Street Journal said the case will be closely watched as other cash-strapped states look to the growing online economy as a new source of tax revenue.

“In light of the current pandemic and economic uncertainty, increasing taxes on services used by small businesses to keep themselves running is a particularly poor and ill-timed policy,” said Caroline Harris, vice president for tax policy at the U.S. Chamber of Commerce.

Under the law, companies with annual gross revenue between $100 million and $1 billion globally will have to pay a 2.5% tax on their digital ad revenue in Maryland. Companies that make over $15 billion in global gross revenue a year will qualify for the top tax rate of 10%.

“At a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and small businesses can foot the bill, or big tech can start paying their fair share,” Maryland Senate Democrats said in a tweet.

According to the suit, however, the law is “a highly unusual and extraordinarily severe form of exaction” that, for most affected companies, “will impose liability nearly 20 times greater than Maryland’s standard corporate income tax, wiping out most digital advertisers’ entire profits on services.”

The tax, the plaintiffs argued, reflects “a legislative purpose to punish large, out-of-state digital advertising companies for their extraterritorial activities.”

 

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