Calls For A Digital Services Tax Intensify In Europe, As A Similar Tax Is Struck Down Stateside

Maryland Governor Larry Hogan’s (R) May 7 veto of two bills that would’ve imposed state-level digital taxes comes as the international push for new digital services taxes is ramping up. 

One of the digital tax bills vetoed by Hogan would’ve imposed the nation’s first tax on digital advertising. The other tax hike vetoed by Hogan, House Bill 932, would’ve applied the state sales tax to streamed movies, downloaded music, e-books, and a host of other digital goods and services. 

“The economic fallout from this pandemic simply makes it impossible to fund any new programs, impose new tax hikes, nor adopt any legislation having any significant fiscal impact,” Governor Hogan explained in his veto statement. 

Days after Governor Hogan’s veto, France finance minister Bruno Le Maire expressed the opposite sentiment to reporters regarding a similar digital services tax proposal on the other side of the Atlantic. 

“Never has a digital tax been more legitimate and more necessary,” Le Maire told members of the press during a recent conference call. 

France proposed its own digital tax last year. Digital services taxes have also been introduced, or there are plans to introduce them, in Spain, Italy, the United Kingdom, and the Czech Republic. In January France suspended its digital tax until the end of the year, allowing Organization for Economic Cooperation and Development digital tax talks to first proceed. 

While the digital tax debate among OECD nation’s continues, Governor Hogan’s recent veto in Annapolis prevented the implementation of a stateside digital tax that would’ve undercut the message and position of the Trump administration, which has been a leading critic of French and other European digital tax efforts.

Treasury Secretary Steven Mnuchin has criticized French and other European digital tax proposals as discriminatory, targeting predominantly U.S.-based tech companies. Making this case would’ve been “a lot harder when Maryland has one,” explains Ruth Mason, a professor at the University of Virginia law school.  

Not All Digital Taxes Are Created Equal

It is important to differentiate between the two types of digital tax hikes vetoed by Governor Hogan. One of the two digital services taxes vetoed by Hogan – HB 932, which extended the state sales tax to digital goods and services – has been enacted by 29 other states and is nothing new. The other tax hike, HB 732, sought to tax digital advertising. HB 732, had it been enacted, would’ve been the first digital advertising tax of it’s kind in the U.S.

Governor Hogan’s veto pen saved Maryland taxpayers the legal expenses that would’ve been required to defend the digital ad tax in court. Among the many strikes against HB 732 was that its enactment was likely to trigger a legal challenge as a violation of the federal Internet Tax Freedom Act. 

Of the two digital tax hikes vetoed by Governor Hogan, HB 732, the digital ad tax, is seen as the far more odious proposal. Even those who supported HB 932 were opposed the digital ad tax imposed by HB 732. 

“There is no tax or economic reason to tax a sweater or a toaster but exempt an e-book,” writes David Brunori, professor of public policy at George Washington University, in defense of measures like HB 932. While Brunori supports taxation of digital goods and services in the manner proposed by Maryland HB 932, he and other tax experts vehemently reject digital ad tax proposals like Maryland’s HB 732.

The need to avoid taxation of business inputs, so as to prevent tax pyramiding, is a driver of this opposition to digital ad taxes. As Professor Brunori explains in a recent Law360 article, “business purchases of digital goods and services should be exempt because business inputs should never be subject to sales tax.”

“Thus states should avoid policies such as those proposed in Maryland, Nebraska and New York, to target digital advertising services – purchases made exclusively by business,” Brunori adds. “Legally, states should be careful not to run afoul of the Internet Tax Freedom Act , which prevents the taxing of digital goods when nondigital goods are not taxed.”

Governor Hogan’s veto means that the U.S. remains a digital ad tax free zone, for now. There are similar proposals pending in the New York and Nebraska legislatures. Further, as state revenues drop in response to the pandemic-drive economic downturn, expect governors and legislators in other states to look to digital taxes as a way to raise revenue for government coffers.