As digital advertising becomes one of the most popular means of communication for brands and companies, the impact is trickling down to the world of tax, with states searching for new revenue streams to align with the changing economy. Enter: digital advertising taxes, a controversial new element of state tax policy. With Maryland leading the way, Washington recently following and many other states with proposals drafted, these taxes are introducing complex compliance requirements and challenging the way businesses have traditionally approached advertising. 

OVERVIEW OF MARYLAND’S DIGITAL ADVERTISING TAX 

Maryland was the first state to start taxing digital advertisements by implementing the digital advertising gross revenues tax (H.B. 732 CH 37) in 2020. Maryland imposed a Digital Advertising Tax (DAT) on annual gross revenues derived from digital advertising services in Maryland, with rates ranging from 2.5% to 10%, depending on the taxpayer’s global annual gross revenues. The tax affects providers of digital advertising services, not purchasers, and applies only to those with at least $1 million in Maryland digital advertising revenue and $100 million in global annual gross revenues. 

Key Features of Maryland DAT

The Maryland-sourced revenue is determined by an apportionment formula based on the number of devices accessing the digital advertising service from Maryland compared to all locations. The tax applies on digital interfaces (e.g., websites, apps), including banners, search engines and interstitial advertising, but only if the services are both programmatic and visually conveyed. Meaning that audio-only and non-programmatic advertising are excluded. There are also exemptions for advertising on digital interfaces owned or operated by broadcast or news media entities. The law further prohibits providers from directly passing the tax onto customers through separate fees, surcharges or line items. 

Recent Developments and Litigation

The implementation of this tax was instantly met with multiple lawsuits from the U.S. Chamber of Commerce, large companies such as Amazon and Verizon, and others. These groups primarily claimed the tax was a violation of the Internet Tax Freedom Act (ITFA), the Commerce Clause and the First Amendment, with challenges based on several grounds, including:

• Internet Tax Freedom Act (ITFA): ITFA prohibits state and local governments from imposing discriminatory taxes on electronic commerce. Maryland’s DAT creates a disproportionate burden on digital advertising compared to traditional advertising
• Commerce Clause: The Commerce Clause regulates activities that have a substantial impact on interstate commerce. Although the DAT is only imposed on digital advertising revenue sourced to Maryland, the tax rate is determined using worldwide revenue, which disproportionally targets large businesses and creates a tax burden based on out-of-state activity, which courts generally view as discriminatory
• First Amendment: Originally, Maryland prohibited companies from passing the cost of the DAT onto customers as a separate fee or line item. The company could increase their service cost to reflect the new tax but were required to do so in silence and could not explain the increase to customers. The state originally included this language in the bill to avoid public criticism, but a U.S. Court of Appeals for the Fourth Circuit ruled that it was unconstitutional as it infringed on freedom of speech, and the imposition of such provision was permanently banned 

GHJ’s Observation: Overall, the courts have focused on whether digital and traditional advertising are similar for ITFA purposes, the constitutionality of the passthrough prohibition and the fairness of the apportionment method. The use of global revenues to set rates is particularly controversial. Maryland had envisioned this tax to be a significant revenue stream for educational reform but has instead been met with continuous litigation and other unintended consequences, such as refunds and damage to their reputation as a business-friendly state. 

Maryland’s DAT has served as a model for similar proposals in other states, such as California, Connecticut, Massachusetts, Minnesota and Nebraska, though none have yet been enacted. This has made other states cautious, as the legal challenges and administrative complexities have highlighted the risks of such taxes. The outcome of Maryland’s litigation is being closely watched and is likely to influence whether other states proceed with similar taxes.

WASHINGTON’S LEGISLATIVE UPDATES

Despite the challenges Maryland has publicly dealt with, the State of Washington expanded their sales tax regime at the end of 2025 to include digital advertising services (ESSB 5814). The bill significantly expands the scope of the retail sales tax and the retailing Business and Occupation (B&O) tax to include a broad range of services that were previously not subject to these taxes. Some of the more significant services subject to both retail sales tax and retailing B&O tax are:

Washington Digital Advertising and Marketing Services

All digital and nondigital services related to the creation, preparation, production or dissemination of advertisements services are subject to tax. In addition, art direction, graphic design, production supervision, ad placement, referrals, acquisition of ad space (including online), campaign planning, lead generation and monitoring/evaluation of ad effectiveness are taxable services.

• Exclusions: Notably, web hosting and domain registration, as well as services rendered in respect to newspapers, printing/publishing, radio, television broadcasting and out-of-home advertising (e.g., billboards, transit ads, in-store displays) are not subject to retail sales tax. The sales of advertising services between affiliated group members are not considered retail sales
• Sourcing: The digital advertising is sourced to the location where the customer first uses the advertising services. For dissemination, this is where the ad is viewed; for creative services, it is where the client reviews the work. If the location is unknown, the seller may use the purchaser’s address
• Multiple Points of Use (MPU): If digital advertising is disseminated both inside and outside Washington, the MPU exemption may apply, allowing apportionment of use tax instead of sales tax

Live Presentations

Lectures, seminars, workshops or courses attended in person or through internet/telecommunications that allow real-time interaction between presenter and audience are taxable services. 

• Exclusion: Live presentations provided by accredited preschools, elementary, secondary or higher education institutions as part of their educational programs are generally excluded. One-on-one instruction, prerecorded presentations, performances, sports events, movies and tutoring are also excluded. Sales between members of an affiliated group are not considered retail sales
• Sourcing: These are sourced to the event location for in-person events or to the attendee’s location for remote events. For hybrid events, sourcing is based on each attendee’s attendance method

Information Technology (IT) Services

The services subject to retail sales tax are IT training, technical support, network operations, help desk, data entry and data processing. Web hosting, domain registration and payment processing are not classified as retail sales. 

GHJ Observation: Washington’s law goes further than Maryland’s by taxing creative services, like ad design, and using its own sourcing rules, showing that states are taking different approaches to the tax. Unlike Maryland’s gross revenue approach, Washington integrates digital advertising into its existing sales tax framework. Revenue from this expansion is slated to provide funding for education, health care and social programs. However, the law has already been met with litigation, mirroring Maryland’s challenges, and argues violations of the ITFA and discrimination protected under the Commerce Clause. The outcomes of these cases over the upcoming months will be crucial in setting precedents for states considering similar implementations.

These developments signal new complexities for businesses to remain in tax compliance. Smaller businesses face the greatest burden, as advertising alternatives such as television or billboards ads are significantly more expensive than digital ads on platforms such as Facebook. Whereas national companies may redirect ad spending to other states without these taxes and potentially reduce overall sales and tax revenue. This raises equity concerns, as the tax disproportionately strains businesses that primarily support local economies. 

FUTURE LOOKING: TAXES ON DIGITAL ADVERTISING AND MORE

States may not stop at digital advertising. Washington’s recent expansion includes live presentations, a category many states have yet to provide formal guidance on. While the Streamlined Sales and Use Tax agreement exempts live instruction from tax, Washington’s stance suggests a willingness to challenge traditional norms. This aggressive approach signals that states may soon consider targeting other digital revenue streams. For businesses impacted by these taxes or leaders looking at the implications they may have in their states, GHJ’s State and Local Tax Practice can help you interpret, understand and take action regarding these taxes.