Taxing digital ads opened Maryland up to litigation. McKee wants Rhode Island to do it anyway.

Yahoo

07-02-2025

The U.S. District Courthouse in Baltimore. The state of Maryland has faced an avalanche of legal attacks in state and federal court from the tech companies and trade groups after its Democratic legislature passed a digital advertising tax in 2021, overriding the veto of then-Gov. Larry Hogan. (Photo by Danielle E. Gaines/Maryland Matters)
Is a $20 million boost to state coffers worth risking years of court battles — and potentially big financial losses — with technology giants like Apple and Meta?
The question hung, unanswered, over the second floor of the Rhode Island State House Thursday, where the Rhode Island Senate Committee on Finance gave an initial vetting to a proposed state tax on billion dollar companies for money made locally on digital advertising. No votes were taken, as is customary in preliminary committee hearings.
Gov. Dan McKee pitched the 10% tax as part of his proposed fiscal 2026 budget. If enacted, the tax on the local share of digital advertising for companies with $1 billion or more in gross revenue would bring in $9.6 million in fiscal 2026, rising to $19.6 million in fiscal 2027.
But the reward might not be worth the risk; just ask Maryland, the only state with a similar tax policy. Maryland's Democratic legislature passed a digital advertising tax in 2021, overriding the veto of then-Gov. Larry Hogan.
Maryland has since faced an avalanche of legal attacks in state and federal court from the tech companies and trade groups representing them. A federal judge Baltimore has tossed many of the lawsuits, which make claims ranging from First Amendment violations to commerce and due process concerns. A separate set of complaints are still open in Maryland Tax Court, with a judge in January calling for an extended discovery process in one case filed by Apple, Google, Meta and Peacock, according to news reports.
Zachary Lilly, deputy director of state and federal affairs for NetChoice, a trade group representing large tech and social media companies, warned Rhode Island lawmakers that the Ocean State could be facing a similar set of legal challenges if it enacts a digital advertising tax.
'It's wiser to wait until legal proceedings in Maryland run their course,' Lilly said. 'Otherwise those dollars will need to be returned, costing the state and the taxpayer far more than they ever gained.
Sen. Sam Zurier, a Providence Democrat and civil attorney, was already worried, even before Lilly spoke. Earlier in the hearing, he peppered Neena Savage, state tax administrator, with questions about the status of the Maryland cases and potential consequences if Rhode Island faces, and loses, similar legal battles.
Savage's answers hardly offered reassurance. She said Rhode Island could 'potentially' have to repay the companies it taxed if it lost a lawsuit. She was 'not certain' whether the state might also have to cover attorneys' fees for the plaintiffs if that was the case.
As for the likelihood of getting sued?
'There's always a potential for litigation with any tax law enacted,' Savage said. 'We would have to weigh the consequences and risks at that time.'
A report prepared by the Rhode Island Senate Fiscal Office found Rhode Island's proposal avoids potential commerce-related violations by using a flat tax, rather than the tiered structure in Maryland. But both rely on another sore spot to tech companies: a 'pass-through clause' which prevents the advertising companies from passing on the tax to consumers through an extra fee or surcharge.
Also unclear from initial discussion Thursday: how the state determines the amount of revenue it can tax. McKee's budget calls for two new tax employees — with a $550,000 price tag — to help develop rules and regulations, and enforcement of the new tax.
Broadly, the plan would be to calculate ad revenue from Rhode Island based on the proportion of devices tracked by a given company, like Meta, that are located within the physical boundaries of the Ocean State, Savage said. That proportion would be applied to total revenues to determine revenue specific to Rhode Island, with the smaller figure then subject to a 10% tax.
But what happens if someone's browsing the internet using a Virtual Private Network, which would mask their identity and location, asked Sen. Lou DiPalma, a Middletown Democrat. Savage wasn't sure.
Relatedly, Deb Peters, a former South Dakota state senator who now represents the Association of National Advertisers, testified about the lack of clarity around device data collected from people who travel through Rhode Island, but don't actually live there.
The original version of McKee's plan would have also taxed media companies, affecting the parent companies of The Providence Journal, WPRI-TV and WJAR-TV. However, McKee has since put in a budget amendment exempting news media and broadcast entities, according to a Feb. 3 letter from Joe Codega, state budget officer.
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