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When Worlds Collide: How Tangible Tax Burdens Attach to Digital Commerce in the United States (Part 2)




Part 1 of this series discussed the proposals adopted by various countries to impose taxes on the digital economy, particularly by taxing various types of digital advertising and other digital services. These taxes allow countries to reach taxpayers who are not physically located within their jurisdiction and to raise revenue from the activities those taxpayers undertake to access the market in the area governed by the taxing authority.

The potential for raising revenue from new sources is not lost on the various states in the U.S. Until relatively recently, states have passively watched as companies have exploited the goldmine of user generated data produced by their residents, being unable to tax these companies because they have no physical connection to the state. Over time, some of the more aggressive states pushes sales tax policies that imposed tax collection obligations on out-of-state companies. The digital service taxes passed by various countries around the world now represent a new approach for states to raise revenue from beyond their borders. The states see these taxes as a way to, among other things, make successful companies pay their “fair share,” provide consumer protection and additional layers of regulation to the use and exploitation of personal information, and hold tech companies accountable to the high cost for the various societal and political ills caused by social media, misinformation, content censoring, and so on.

One unfortunate downside of these taxes are patchwork requirements and thresholds; there is no uniform digital service tax roadmap for the states to follow. For example, these taxes are often imposed on entirely different activities: providing online services, selling personal information, furnishing access to social media, or selling digital advertising. For purposes of this article, all such taxes will be referred to as digital services taxes interchangeably, except where specifically noted. The variety of approaches to digital taxation can be a trap for the unwary taxpayer who may unknowingly fall within a state’s taxing authority.


Earlier this year, Maryland became the first state in the U.S. to impose a tax on digital services and advertising. Since then, several other states, including Massachusetts, New York, Texas, and West Virginia have advanced similar legislation. Meanwhile, other states, such as Oregon, Washington, and Montana, have introduced similar legislation, but have decided to abandon these endeavors for the time being.

Unlike the digital taxes imposed under the domestic laws of foreign nations, digital taxes in the U.S. face a number of steep hurdles under the U.S. Constitution (including challenges under the Supremacy Clause, Commerce Clause, and Due Process Clause), federal laws (including the Permanent Internet Tax Freedom Act), and various provisions of the applicable state constitutions. At present, several lawsuits are challenging Maryland’s digital service tax on similar constitutional and other legal grounds.

There may be additional challenges for state-level digital service taxes in the future, as the adoption of a global minimum tax (Pillar 2 of the OECD inclusive framework on Base Erosion and Profits Shifting, discussed in Part 1 of this series) may require the elimination of digital service taxes of all types, although the precise timing and scope of such elimination remains to be seen.

Maryland Digital Advertising Tax

Maryland’s Digital Advertising tax was passed in early 2021 and certain requirements were clarified by later amendment and by Proposed Regulations issued in August 2021. As with the various proposals seen in other nations, Maryland’s digital tax is imposed on gross revenues from digital advertising services provided in the state (“advertisement services on a digital interface” to be precise). This tax only applies to companies earning at least $1 million in digital advertising revenues from Maryland. If the tax applies, the tax rate escalates based on the company’s global annual revenues.

Maryland-specific revenues (i.e. the revenue subject to this tax) are determined by multiplying the taxpayer’s total revenue by the ratio of the number of devices accessing the taxpayer’s digital advertising services from Maryland to the number of devices accessing these services from any location.

To determine what revenue is earned and taxed in Maryland, the taxpayer must first know what number of devices are accessing its digital services and then determine where the users of such devices are located. Maryland’s tax structure relies on the device location to determine where the users are located, and in turn requires taxpayers to apply all known information, including, technical information, digital advertising contracts, internet protocol, geolocation data, device registration, cookies, and other comparable information to identify the location of each device accessing its digital services. If a device’s location is uncertain, due to usage of a VPN, IP proxy, or roaming cell coverage (among myriad other causes of uncertainty), the revenue generated from such a device is not considered in the calculation.

Oregon Digital Tax

In 2021, Oregon House Bill 2392 was introduced to impose a 5 percent tax on gross receipts derived from selling the personal information of Oregonians. The bill, as written, would apply to the sale of any information collected or accumulated from online sources, which identifies, relates to, describes, or is capable of being associated with an individual located in Oregon. As with the Maryland proposal, location would largely be determined by reference to IP address.

While Oregon’s digital tax bill was ultimately abandoned, it is instructive for several reasons. This bill gives insight into the current mindset of Oregon’s legislature and its intent to protect consumers while taxing the activities that generate profits within its boundaries. There are realistic hurdles that a digital tax bill would have to surmount before it may become law in Oregon, not the least of which is the Oregon corporate activity tax, which already applies to revenues earned from digital activities (including the sale of personal information, advertising, and the like). Yet, this may be a tax worth watching for in the future, particularly if the tax in Maryland survives its own constitutional and legal challenges and provides a blueprint for other states to follow.

Other Western States

Both Washington and Montana introduces taxes on digital business in 2021. The Montana proposal would have imposed a 10 percent tax on revenues from digital advertising services earned by businesses with over $25 million in annual, global revenues, while the Washington approach more closely paralleled the Oregon proposal. Like the proposed Oregon tax, the Washington bill would have been imposed on the sale of personal data; however, the tax would have been administered as an addition to the state’s ordinary business and occupations tax. And, like the Oregon proposal, the taxes in both Washington and Montana failed to muster support and were ultimately left for later consideration.


Even though state-imposed digital service taxes are in their infancy, many states are jumping on the bandwagon. Without a model or guidelines to follow, a nationwide patchwork of digital service taxes will create complexity and the potential for double taxation of revenues derived from digital activity. One specific cause of confusion is that states appear to be taking different approaches to the digital economy, and therefore focus on different activities upon which to impose tax: digital advertising, use of social media, or sale of personal information. While some states or regions embrace a tax on all of these activities, other states have proposed bills that emphasize one in particular. For example, states on the Pacific coast particularly seem to be trending toward the taxation of sale or exploitation of personal information, while nearby western states appear to be more closely aligned with the advertising tax advanced in Maryland.

Businesses should monitor the development of the various digital service taxes around the country, especially from states in which they generate revenue from selling advertising, customer information, or social media access online. No longer is it okay to assume that physical presence in a state is a prerequisite to taxation or that conducting business in a digital medium will fly under the radar. States are advancing innovative tax policies to attempt to address the economy of the now and future of the digital economy.

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