Brief of Amici Curiae Tax Law Professors in Support of Defendant’s Opposition To Plaintiffs’ Motion for Summary Judgment

Chamber of Commerce of the United States of America, et al., v. Peter Franchot, Case No. 1:21-cv-410-DKC, Document 37-3 (U.S. District Court for the District of Maryland)

17 Pages Posted: 11 Oct 2021

See all articles by Darien Shanske

Darien Shanske

University of California, Davis - School of Law

Young Ran (Christine) Kim

University of Utah, S.J. Quinney College of Law

Aman George

Democracy Forward Foundation

Samara Spence

Democracy Forward Foundation

Date Written: September 20, 2021

Abstract

Digital advertising is a more than $191 billion market that touches the lives of almost every American in significant and often nearly invisible ways. Enabled by complex modern technologies, digital advertising platforms have no parallel in the non-digital world. These platforms sell advertisers precisely targeted, individualized, and verifiable access to Maryland residents. Their business practice relies on two-sided, mutually re-enforcing transactions. On one side, advertisers pay digital advertising platforms to display their ads to users and provide information on the number and kinds of users that respond to those ads. On the other, the platforms engage in a barter with users: exchanging services (e.g., social networking or search) for the right to place targeted advertising in front of them and to collect expansive user data (e.g., where those users browse the web, how they use the platforms’ services, or whether they click on an ad), including by installing small bits of tracking code on users’ web browsers and mobile devices. The success of the first side of the transaction depends on, and is deeply integrated with, the barter exchange (e.g., platforms simultaneously show a user a targeted ad, collect data about that users’ activities, adapt ads in real-time to increase the chance of affecting user behavior, and get paid by the advertiser based on the user’s activities).

Maryland’s new law imposes a tax on a percentage of revenues derived from digital advertising in Maryland by certain digital advertising platforms with over $100 million in global revenues. Plaintiffs allege that this scheme punishes out-of-state conduct. It does not. It is essentially a consumption tax on the delivery of ads to Maryland users. These ads represent a constant, real-time exchange with Maryland residents that allows platforms to collect both the raw material for, and the basis for payment by, advertisers to the platform. The provision of data from Marylanders generates substantial revenues at high profit margins for digital advertising platforms, typically without being recognized or taxed in the location where valuable user data is collected. Maryland’s law merely taxes revenues uniquely generated by digital advertising platforms that were previously untaxed and that result from exchanges with Maryland users. Likewise, examining a taxpayer’s revenues outside a jurisdiction to apportion taxable revenues generated in-state and to set the proper tax rate is a common and reasonable practice.

Amici write here to respond to Plaintiffs’ attempt to permanently shield the digital advertising industry from the reach of state tax law by seeking a declaration that such taxes are categorically preempted by the nondiscrimination provisions of the federal Internet Tax Freedom Act (ITFA). The ITFA prohibits only state taxation that discriminates between products in ecommerce and “similar” non-digital products or services. Digital advertising is not similar to any non-digital service for purposes of the ITFA, including non-digital advertising, and there is no evidence that Congress intended to shelter digital advertising platforms from targeted taxes in the states where the platforms deliver ads and extract significant value for themselves.

Maryland is the first state to enact a digital advertising tax, but it is far from unique. Many taxing authorities are actively grappling with the proper allocation and taxation of the digital economy. Indeed, as of this writing, at least seven other states are considering following in Maryland’s stead and enacting similar taxes on digital services. If the Court reaches the ITFA claim at all, the Court should decline to create the tax shield that Plaintiffs seek.

Keywords: Digital Advertising Tax, Digital Ad Tax, state and local tax, digital tax, two-sided market, Maryland Digital Advertising Tax, digital ad, state taxation, Internet Tax Freedom Act, ITFA, platform economy, preemption, principles of preemption, e-commerce, tax policy,

JEL Classification: E62, H2, H20, H25, H26, H3, H7, H70, H71, H73, K00, K34,

Suggested Citation

Shanske, Darien and Kim, Young Ran (Christine) and George, Aman and Spence, Samara, Brief of Amici Curiae Tax Law Professors in Support of Defendant’s Opposition To Plaintiffs’ Motion for Summary Judgment (September 20, 2021). Chamber of Commerce of the United States of America, et al., v. Peter Franchot, Case No. 1:21-cv-410-DKC, Document 37-3 (U.S. District Court for the District of Maryland), Available at SSRN: https://ssrn.com/abstract=3928211

Darien Shanske

University of California, Davis - School of Law ( email )

400 Mrak Hall Dr
Davis, CA CA 95616-5201

Young Ran (Christine) Kim (Contact Author)

University of Utah, S.J. Quinney College of Law ( email )

383 S. University Street
Salt Lake City, UT 84112-0730
United States

Aman George

Democracy Forward Foundation ( email )

P.O. Box 34553
Washington, DC 20043
United States

Samara Spence

Democracy Forward Foundation ( email )

P.O. Box 34553
Washington, DC 20043
United States

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