Why shouldn't I move to Maryland

US member states are now also relying on digital taxes

The American government has fought against the discriminatory taxation of American technology companies on a global level. Now such taxes are picking up speed themselves in America. That should lead to a rethink in Washington.

Something remarkable is happening in the American state of Maryland at the gates of the capital Washington DC. A tax levied on sales generated by digital ads could come into effect in Maryland as early as mid-March. It would be the first such digital tax in the United States.

The template for the tax was launched in early 2020. It was adopted by the democratically controlled legislature of Maryland in March of last year with comfortable majorities. The governor of the state, the moderate Republican Larry Hogan, however, vetoed it in May. Last week, both chambers overruled the veto with the necessary three-fifths majorities, the Senate with 29 to 17 and the House of Delegates with 88 to 48 votes.

The big ones should pay the most

The tax applies to digital ad revenue that is served and shown in Maryland and is levied on the revenue companies generate from such ads. Firms with $ 100 million or more in global sales - but no more than $ 1 billion - pay a 2.5% tax on their digital advertising revenues. The tax increases to 5% for companies with worldwide sales between $ 1 and 5 billion and to 7.5% for companies with annual revenues between $ 5 and 15 billion. Companies with more than $ 15 billion in revenue - including Facebook and Google - pay a 10% tax.

The tax already applies to the current tax year. The first quarterly payment must be made on April 15, at least 25% of the tax that is expected to be due for the full year 2021. The authorities of the state of Maryland anticipate additional revenue of $ 250 million per year.

Maryland's digital tax is doing exactly what the Trump administration previously fought rigorously on a global scale. Washington believed that the various overseas taxes being envisaged (and now implemented) on sales of digital services unfairly discriminate against American companies.

The US Trade Representative's office therefore launched a series of so-called 301 investigations and, in the case of France, came to the conclusion as early as December 2019 that the French digital tax should be compensated for with US punitive tariffs on imports from France. The levying of tariffs was then waived in order to give a negotiated solution within the framework of the OECD a chance.

In the case of India, Italy, Turkey, Austria, Spain and Great Britain, Washington came to the conclusion that the respective digital taxes discriminated against US companies, were incompatible with applicable principles of international taxation and burdened or restricted American trade. The Trump administration has not completed investigations into four other jurisdictions that consider digital taxes - Brazil, the Czech Republic, Indonesia, and the European Union.

In fact, digital taxes, including the one now adopted in Maryland, discriminate between online and offline businesses. In addition, they only apply above a certain, arbitrarily determined turnover threshold. Finally, the retroactive application of tax to sales instead of profits violates recognized principles of international tax policy.

It is not known what the new US administration intends to do at the international level with the digital tax dossier and the various investigations. Trump's trade representative Robert Lighthizer struck conciliatory tones towards the end of the Trump administration. Punitive tariffs against digital taxes abroad were no longer an issue. Instead, he emphasized the importance of the issue and expressed the hope for a solution on a global level. The new Treasury Secretary Janet Yellen should pick up on this.

Washington needs the books

With the new digital tax in Maryland, the previous US argument that digital taxes are a foreign phenomenon is no longer applicable, especially since other states are also pursuing similar projects. Bills have already been launched in Connecticut and Indiana to tax the digital giants. Such tax proposals failed in West Virginia and New York last year, but after the success in Maryland, proponents could smell the morning breeze.

All the more so as the loss of income at the state level due to the Corona crisis is beginning to take shape. Maryland digital tax proceeds have always been used to increase spending on education, but needs have grown even greater. In addition, it could become socially acceptable nationwide to fleece crisis winners such as Amazon, Google and Facebook. This is also against the background of the controversies surrounding the protection of privacy and freedom of expression as well as the increased market power of tech companies. Nobel laureate Paul Romer is also considered to be the inspiration for the tax in Maryland. The economist argues that the taxation of Facebook and Google's advertising business could drive these companies to adapt their “dangerous” business models.