Case 1:21-cv-00410-DKC Document 1 Filed 02/18/21 Page 1 of 20
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF MARYLAND
`NORTHERN DIVISION
`
`CHAMBER OF COMMERCE OF THE
`UNITED STATES OF AMERICA
`1615 H Street NW
`Washington, DC 20062,
`
`INTERNET ASSOCIATION
`660 North Capitol Street NW, Suite 200
`Washington, DC 20001,
`
`NETCHOICE
`1401 K Street NW, Suite 502
`Washington, DC 20005,
`
`COMPUTER & COMMUNICATIONS
`INDUSTRY ASSOCIATION
`25 Massachusetts Avenue, Suite 300C
`Washington, DC 20001,
`
`Plaintiffs,
`
`v.
`PETER FRANCHOT, in his official capacity as
`Comptroller of the Treasury of Maryland,
`301 West Preston Street, Room 206
`Baltimore, MD 21201,
`
`Defendant.
`
`Civ. No. 21-cv-410
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`COMPLAINT FOR INJUNCTIVE
`AND DECLARATORY RELIEF
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`Plaintiffs the Chamber of Commerce of the United States of America, Internet Association,
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`NetChoice, and the Computer & Communications Industry Association (collectively, Plaintiffs),
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`for their complaint against Peter Franchot, in his official capacity as the Comptroller of the
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`Treasury of Maryland, allege by and through their attorneys as follows:
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`INTRODUCTION
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`1.
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`This lawsuit seeks a declaration and injunction against enforcement of Maryland
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`House Bill 732 (the Act) insofar as it imposes a “Digital Advertising Gross Revenues Tax” on
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`sellers of digital advertising services. The Act is a punitive assault on digital, but not print,
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`advertising. It is illegal in myriad ways and should be declared unlawful and enjoined.
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`2.
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`The background leading to the Act’s passage is undeniable: Maryland lawmakers
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`disapprove of large digital advertising companies and intended to penalize them. A centerpiece of
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`the Act’s legislative history is an article, authored by a witness testifying in support of the Act,
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`which accuses large digital advertising companies of “erod[ing]” the “shared values and norms”
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`of American society. See Paul Romer, A Tax That Could Fix Big Tech, New York Times (May 6,
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`2019), perma.cc/MZ83-NF5Y; see also Testimony from Paul Romer to Budget & Taxation
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`Committee (Jan. 29, 2020), perma.cc/EZ4M-ZEGY. Maryland lawmakers acted on the belief that
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`large digital advertising companies are “too big to trust” and have created “a haven for dangerous
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`misinformation and hate speech.” Romer, A Tax That Could Fix Big Tech. In the run-up to the
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`Act’s passage, that theme was repeated over and over again by the Act’s most outspoken
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`proponents, including Senate President Bill Ferguson, who proclaimed—ironically, over
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`Facebook—that, with the Act, Maryland lawmakers had deliberately “targeted” companies “like
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`Amazon, Facebook, and Google.” See perma.cc/699U-4BQB.
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`3.
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`The premise of the law is deeply flawed. Taxing digital advertising revenue will
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`have the opposite of the Act’s intended effect, reducing resources to support the creation and
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`availability of high-quality ad-supported content, leaving the online field overrun by low-quality
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`“junk” content. Meanwhile, the Act will raise costs for consumers and make it more difficult for
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`businesses to connect with potential customers. Simply put, the Act will harm Marylanders and
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`small businesses and reduce the overall quality of internet content—all while doing nothing to
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`stave off the dissemination of misinformation and hate speech.
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`4.
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`Recognizing the Act’s many infirmities, Governor Hogan vetoed the Act on May
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`7, 2020, calling it “misguided” and “unconscionable.” See Letter from Governor Lawrence J.
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`Hogan, Jr. to Senator Bill Ferguson and Representative Adrienne A. Jones (May 7, 2020),
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`perma.cc/HC8L-FTAY. But on February 12, 2021, the General Assembly voted to override
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`Governor Hogan’s veto.
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`5.
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`Although the Act is styled as a tax, several features confirm its punitive character,
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`including its severity (up to 10% of gross revenues), its focus on extraterritorial conduct, the
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`segregation of its proceeds from the State’s general fund, and the legislative history leading to its
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`enactment. Among other things, the legislative history shows that lawmakers believe that the
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`charge cannot be passed to consumers, and that the targets of the law, and they alone, will bear the
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`burden of the assessment. A pass-through prohibition recently introduced in the Maryland Senate
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`would lock in that understanding; if adopted into law, it would expressly prohibit the targets of the
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`charge from passing it on to advertisers as a line item.
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`6.
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`The Act is unlawful in several ways. First, it is preempted by the Internet Tax
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`Freedom Act (ITFA), which prohibits States from imposing “multiple and discriminatory taxes on
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`electronic commerce.” 47 U.S.C. § 151 note. Second, the Act violates the Due Process Clause and
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`Commerce Clause of the United States Constitution by burdening and penalizing purely out-of-
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`state conduct and interfering with foreign affairs.
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`7.
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`The State is well aware of these defects. In a February 25, 2020 letter, the Office of
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`the Attorney General of Maryland itself concluded that an earlier-introduced version of the Act
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`“would likely be preempted by the ITFA” and requires revisions to avoid invalidation under the
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`federal Commerce Clause. See Letter from Sandra Benson Brantley to Delegate Alonzo T.
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`Washington (Feb. 25, 2020), perma.cc/9SNH-S3FU; see also Letter from Brian E. Frosh to
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`Governor Lawrence J. Hogan, Jr. (April 22, 2020), perma.cc/Y8RD-KVDJ. The necessary
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`revisions were never made.
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`8.
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`Plaintiffs accordingly seek a declaration that the Act is unlawful and an injunction
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`against its enforcement.
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`JURISDICTION AND VENUE
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`9.
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`Plaintiffs bring this suit under 42 U.S.C. § 1983 and 28 U.S.C. § 2201 asserting
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`violations of federal rights and seeking declaratory and injunctive relief. The Court’s jurisdiction
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`is invoked under 28 U.S.C. §§ 1331 and 2201.
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`10.
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`The Court is not deprived of jurisdiction by the Tax Injunction Act (TIA) because,
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`for TIA purposes, the Act imposes a punitive fee rather than a tax. See infra ¶¶ 34-47, 51.
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`11.
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`This Court has personal jurisdiction over Defendant Peter Franchot because he
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`resides within the District of Maryland and performs his official duties there.
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`12.
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`Venue is proper in this District because Franchot resides in the District and a
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`substantial part of the events giving rise to the claims here occurred in the District.
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`THE PARTIES AND STANDING
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`13.
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`Plaintiff Chamber of Commerce of the United States of America (the Chamber) is
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`the world’s largest business federation. It represents approximately 300,000 members and
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`indirectly represents the interests of more than 3 million companies and professional organizations
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`of every size, in every industry sector, and from every region of the country. Among other things,
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`the Chamber works with the federal, state, and foreign governments to achieve a multilateral con-
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`sensus on the taxation of the digital economy. The Chamber is a 501(c)(6) nonprofit organization
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`headquartered in Washington, D.C. The Act is at odds with the Chamber’s policy objectives, and
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`challenging the Act is germane to the Chamber’s mission.
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`14. Many of the Chamber’s members will be liable to pay the charge imposed by the
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`Act. The Act will therefore harm the Chamber’s members by making them liable for the charge,
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`interfering with their business models, and making it more difficult for them to provide high quality
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`services to their clients and customers.
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`15.
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`Plaintiff Internet Association (IA) is the only trade association that exclusively rep-
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`resents leading global internet companies on matters of public policy. IA’s mission is to foster
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`innovation, promote economic growth, and empower people through the free and open internet.
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`Its stated position is that state governments should not adopt taxation measures that discriminate
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`against digital services and are not technologically neutral. IA is a 501(c)(6) nonprofit organization
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`headquartered in Washington, D.C. The Act is at odds with IA’s policy objectives for technology
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`companies, and challenging the Act is germane to IA’s mission.
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`16.
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`A list of IA’s members is available at https://internetassociation.org/our-members/.
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`Many of IA’s members will be liable to pay the charge imposed by the Act. The Act will therefore
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`harm IA’s members by making them liable for the charge, interfering with their business models,
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`and making it more difficult for them to provide high quality services to their clients and
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`customers.
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`17.
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`Plaintiff NetChoice works to make the internet safe for free enterprise and free
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`expression. It engages at the local, state, national, and international levels to protect the interests
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`of the internet and ensure a bright digital future. NetChoice opposes taxes that discriminate against
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`e-commerce, which threaten the internet’s benefits to consumers and small sellers online.
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`NetChoice is a 501(c)(6) nonprofit organization headquartered in Washington, D.C. The Act is at
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`odds with NetChoice’s policy objectives, and challenging the Act is germane to NetChoice’s
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`mission.
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`18.
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`A list of NetChoice’s members is available at https://netchoice.org/. Many of
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`NetChoice’s members will be liable to pay the charge imposed by the Act. The Act will therefore
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`harm NetChoice’s members by making them liable for the charge, interfering with their business
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`models, and making it more difficult for them to provide high quality services to their clients and
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`customers.
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`19.
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`Plaintiff the Computer & Communications Industry Association (CCIA) is a not-
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`for-profit membership organization for a wide range of companies in the computer, internet,
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`information technology, and telecommunications industries. Created over four decades ago, CCIA
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`promotes open markets, open systems, open networks, and full, fair, and open competition. CCIA
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`represents the interests of the world’s leading providers of technology products and services before
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`governments and the courts. It opposes discriminatory taxes. The Act is at odds with CCIA’s policy
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`objectives, and challenging the Act is germane to CCIA’s mission.
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`20.
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`A list of CCIA’s members is available at https://www.ccianet.org/about/members/.
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`Many of CCIA’s members will be liable to pay the charge imposed by the Act. The Act will
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`therefore harm CCIA’s members by making them liable for the charge, interfering with their
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`business models, and making it more difficult for them to provide high quality services to their
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`clients and customers.
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`21.
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`Defendant Franchot is the Comptroller of the Treasury of Maryland. He is
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`responsible for administering the Maryland digital advertising charge.
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`22.
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`23.
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`Franchot is a resident of Maryland and is sued in his official capacity only.
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`In enforcing, administering, and adhering to the Act, Franchot and those subject to
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`his supervision, direction, or control will at all relevant times act under color of state law.
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`FACTUAL ALLEGATIONS
`The Act and its historical context
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`The Act imposes a one-of-a-kind charge on the annual gross revenue of digital
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`A.
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`24.
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`advertising services provided in Maryland. The charge applies only to digital advertising and does
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`not apply to advertising of any kind through other means.
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`25.
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`Section 101(d) of Title 7.5 of the Maryland Tax Article, as amended by the Act,
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`defines “digital advertising services” as “advertisement services on a digital interface, including
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`advertisements in the form of banner advertising, search engine advertising, interstitial advertising,
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`and other comparable advertising services.”
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`6
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`26.
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`Section 101(e) of Title 7.5 of the Maryland Tax Article, as amended by the Act,
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`defines “digital interface” as “any type of software, including a website, part of a website, or
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`application, that a user is able to access.”
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`27.
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`Section 101(f) of Title 7.5 of the Maryland Tax Article, as amended by the Act,
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`defines “user” as “an individual or any other person who accesses a digital interface with a device.”
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`28.
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`The Act “shall be applicable” to all taxable years after December 31, 2020. See Act
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`§ 6. Accordingly, the Act will be enforced as to all covered transactions taking place on January
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`1, 2021 and later. Each company that “reasonably expects . . . annual gross revenues derived from
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`digital advertising services in the state to exceed $1,000,000” in a given year must file “a
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`declaration of estimated tax, on or before April 15 of that year.” Md. Code, Tax-Gen. § 7.5-
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`102(b)(1).1
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`29.
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`The Act charges tiered rates on the “annual gross revenues derived from digital
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`advertising services in the State.” Md. Code, Tax-Gen. § 7.5-102(b)(1).
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`30.
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`Under Sections 13-1001 and 13-1002 of the Tax Article, as amended by the Act,
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`failure to file complete and accurate paperwork and pay the charge as required by the Act is a
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`criminal offense.
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`31.
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`The Act sets tiered rates of assessment on annual gross revenues derived from
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`digital advertising services in the State, based solely on a firm’s global annual gross revenues:
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`(a.)
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`For firms with global annual gross revenues of $100 million or more, the
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`Act imposes a 2.5% assessment rate on all assessable revenues.
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`(b.)
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`For firms with global annual gross revenues of $1 billion or more, the Act
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`imposes a 5.0% assessment rate on all assessable revenues.
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`1 Pursuant to Section 17(d) of Article II of the Maryland state constitution, the Act “shall take
`effect 30 days after the Governor’s veto is over-ridden,” on or around March 14, 2021, prior to the
`April 15, 2021 deadline for initial declarations.
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`(c.)
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`For firms with global annual gross revenues of $5 billion or more, the Act
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`imposes a 7.5% assessment rate on all assessable revenues.
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`(d.)
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`For firms with global annual gross revenues of $15 billion or more, the Act
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`imposes a 10% assessment rate on all assessable revenues.
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`32.
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`The extent of a company’s liability under the Act for revenues earned in Maryland
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`depends in almost all cases on the company’s out-of-state conduct. For example, a company that
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`derives $10 million in annual revenues from digital advertising in Maryland will:
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`(a.)
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`not be liable for any assessment under the Act if it earns less than $90
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`million in revenue outside of the State;
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`(b.)
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`be liable for a $250,000 assessment if it earns between $90 million and $989
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`million in gross annual revenues outside of the State;
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`(c.)
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`be liable for a $500,000 assessment if it earns between $990 million and
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`$4.989 billion in gross annual revenues outside of the State;
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`(d.)
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`be liable for a $750,000 assessment if it earns between $4.99 billion and
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`$14.989 billion in gross annual revenues outside of the State;
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`(e.)
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`be liable for a $1,000,000 assessment if it earns more than $14.99 billion in
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`gross annual revenues outside of the State.
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`33.
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`The only differences among the scenarios described in the immediately prior
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`paragraph are the amounts of revenue earned outside of Maryland, and in direct consequence, the
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`size of the charge owed under the Act.
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`B.
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`34.
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`The Act does not impose a “tax” within the meaning of the TIA
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`The exaction assessed by the Act is a punitive fee, penalty, or fine, and not a “tax”
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`within the meaning of the Tax Injunction Act, 28 U.S.C. § 1341. Several features of the Act
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`confirm this conclusion, including its extraterritoriality, narrow applicability, and assessment
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`against gross revenue rather than net income.
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`8
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`35.
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`The Act targets a small number of large companies, specifically including, accord-
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`ing to Maryland lawmakers, “Amazon, Facebook, and Google.” See perma.cc/699U-4BQB.
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`36.
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`The rate of assessment under the Act is a massive share of each digital advertiser’s
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`gross—not net—receipts, which is a highly unusual and extraordinarily severe form of exaction.
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`For most impacted companies, it will impose liability nearly 20 times greater than Maryland’s
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`standard corporate income tax, wiping out most digital advertisers’ entire profits on services
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`provided in Maryland. See infra, ¶¶ 53-55.
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`37.
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`The Act imposes progressively greater penalties on companies based on their extra-
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`territorial conduct—the more significant a company’s participation in extraterritorial markets for
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`digital advertising, the greater the rate of assessment on revenue derived from digital advertising
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`in Maryland. There is no explanation for this design except a legislative purpose to punish large,
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`out-of-state digital advertising companies for their extraterritorial activities.
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`38.
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`The Act establishes a new tax that applies retroactively to the beginning of the
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`calendar year. As the U.S. Trade Representative noted with respect to France’s similar tax, entirely
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`new retroactive taxes are “disfavored” under “basic concepts of fairness.” Office of the U.S. Trade
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`Representative, Report on France’s Digital Services Tax Prepared in the Investigation under
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`Section 301 of the Trade Act of 1974, at 50 (Dec. 2, 2019) (“USTR Report”), perma.cc/XD9H-
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`ZQ44.
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`39.
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`The legislative history indicates a punitive purpose. In the months leading up to the
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`enactment of the Act, an op-ed appeared in the New York Times accusing Google and Facebook of
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`“mak[ing] their profits using business models that erode” the “shared values and norms on which
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`democracy depends.” Paul Romer, A Tax That Could Fix Big Tech, New York Times (May 6,
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`2019), perma.cc/MZ83-NF5Y. The op-ed described large digital advertising companies as “too
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`big to trust” and creating “a haven for dangerous misinformation and hate speech.” Id. The op-ed
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`called for States like Maryland to impose a “charge” or “penalty” on digital advertisers’ business
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`models, almost exactly in the form of the Act. Id. The Senate sponsors of the Act presented the
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`op-ed’s author, Professor Paul Romer, as a witness in support of the Act and included his op-ed in
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`the legislative history. See Testimony from Paul Romer to Budget & Taxation Committee (Jan.
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`29, 2020), perma.cc/EZ4M-ZEGY.
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`40.
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`Professor Romer’s testimony at the Senate hearing echoed his op-ed. He stated his
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`opinion that “the market for digital services is broken and that a tax on digital advertising can help
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`restore the conditions needed for the market to work.” In his view, “the pervasive dishonesty of
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`the people who have made hundreds of billions from targeting and tracking is the final proof that
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`something is terribly wrong with the market for digital services.” See Testimony from Paul Romer
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`to Budget & Taxation Committee.2
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`41.
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`Senate President Ferguson, a sponsor of the Senate companion bill, explained that
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`the growth of “[m]assive technology corporations . . . has resulted in negative externalities
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`socialized and borne by the public. . . . [E]xternalities created by private actors’ actions must be
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`borne by that actor.” See perma.cc/N975-TAXK, at 7. And he explained where the law came from:
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`The “solution” that the Act implements “is based off a model originally built by Paul Romer . . .
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`to levy a progressive tax on the currently untaxed revenues of companies’ revenue from digital ad
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`revenue.” Id. Senator Ferguson then reiterated who should foot the bill—“large multinational
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`corporations with at least $100 million in annual digital ad revenues each year”—and who should
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`not—“Marylander[s].” Id. at 7-8.
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`2 The opinions expressed in Romer’s op-ed are deeply flawed. First, Professor Romer does not
`explain why burdening digital advertising will improve the quality of content online. In fact,
`placing massive financial burdens on digital advertising will inhibit the primary funding source
`for high-quality internet content and do nothing to discourage low-quality content. They also will
`drive more quality content behind subscription-only paywalls, making it less accessible and
`encouraging an unhealthy “echo chamber” effect. Second, the Act will indirectly harm a wide
`range of other business and consumer interests, raising costs for consumers and making it harder
`for businesses to connect with potential consumers. The Act’s design thus will not even accomplish
`the goal it is supposed to; indeed, it will undermine that goal.
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`42.
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`Under Sections 2-4A-01 and 2-4A-02 of the Tax Article, as amended by the Act,
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`the proceeds of the Maryland digital advertising charge are used to pay for administration of the
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`Act and otherwise deposited in the “Blueprint for Maryland’s Future Fund.” Proceeds deposited
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`in the Blueprint for Maryland’s Future Fund are kept segregated from the Maryland general fund
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`and earmarked for specific educational purposes including, in part, to address through education
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`the perceived “externalities” created by the companies targeted by the Act.
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`43.
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`The Act is akin to a fine for perceived misconduct or a legislatively-mandated
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`restitution payment as remediation for purported externalities.
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`44.
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`Delegate Alonzo Washington, the Vice Chair of the Ways and Means Committee,
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`explained to lawmakers that “[a]s we all know, giant technology companies are increasingly
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`collecting and utilizing our personal data” and questioned whether the conduct of such companies
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`is “helping to build the future of democracy in our state.” See perma.cc/QMJ7-6LJG. He also told
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`lawmakers, “[i]t is clear that massive, multinational companies have made significant profits from
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`targeted advertising. This bill specifically targets companies who have digital ad revenues of at
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`least $100 million.” Id.
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`45.
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`A proposed pass-through prohibition (Senate Bill 787), if adopted, would expressly
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`bar companies from “directly pass[ing] on the cost of the tax imposed.” Its mere introduction
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`confirms the fact that lawmakers want only the targets of the charge to pay.
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`46.
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`Even independent of the proposed pass-through prohibition, lawmakers believe that
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`“it’s not likely that large tech companies would be able to pass through the Maryland tax costs.”
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`Danielle E. Gaines, Digital Ad Tax Debate Continues, Maryland Matters (Feb. 8, 2021),
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`perma.cc/QVY6-6V6L (“Debate Continues”). Senate President Ferguson introduced the express
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`pass-through prohibition merely for a “‘belt and suspenders’ approach” (id.), stressing during a
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`recent hearing that Senate Bill 787 is not “necessary” to prevent pass-through of the charge and
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`calling the bill a mere “clean-up” measure.
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`47.
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`In the months following the Governor’s veto, the Act’s sponsors have continued to
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`describe the Act as “target[ing] the largest tech companies—those with more than $100 million in
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`annual global revenues—who store and manipulate users’ personal data.” See Debate Continues.
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`The Act thus narrowly targets large internet advertising companies.
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`C.
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`48.
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`The word “tax” as it appears in ITFA and the TIA has different meanings
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`Although the charge imposed by the Act is not a “tax” for purposes of the TIA, it
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`does constitute a “tax” for purposes of ITFA preemption. In the context of two “different statutes”
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`serving different purposes like these, singular words appearing in both statutes may be given
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`“different shades of meaning and consequently may be variously construed.” Environmental
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`Defense v. Duke Energy Corp., 549 U.S. 561, 574 (2007). The meanings of words must “vary to
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`meet the purposes of the law, to be arrived at by a consideration of the language in which those
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`purposes are expressed, and of the circumstances under which the language was employed.” Yates
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`v. United States, 574 U.S. 528, 538 (2015); accord id. at 537 (“We have several times affirmed
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`that identical language may convey varying content when used in different statutes.”).
`
`49.
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`The TIA was enacted by the 75th Congress in 1937 (see Act of Aug. 21, 1937, ch.
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`726, 50 Stat. 738) and was modeled on the Anti-Injunction Act (AIA), which was enacted by the
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`39th Congress in 1867 (see Revenue Act of 1867, ch. 169, § 10, 14 Stat. 471, 475-476). ITFA,
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`meanwhile, was enacted by the 105th Congress in 1999. The TIA was enacted for federalism
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`purposes, while ITFA was enacted for federal purposes—to prevent discriminatory state taxes that
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`would harm the development of electronic commerce. What the 75th and 39th Congresses would
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`have meant by the word “tax” in the TIA and AIA differs from the meaning ascribed to the word
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`by the 105th Congress in ITFA, which serves a different purpose.
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`50.
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`This is made clear by the express definition that the 105th Congress gave to the
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`word “tax” in ITFA. According to that definition, a “tax” within the meaning of ITFA includes
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`any “charge imposed by any governmental entity for the purpose of generating revenues for
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`governmental purposes” other than use fees, i.e., “fee[s] imposed for a specific privilege, service,
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`or benefit conferred.” 47 U.S.C. § 151 note § 1105(8)(A)(i). Thus, any governmental “charge” that
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`is not a use fee is a “tax” within the meaning of ITFA.
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`51.
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`ITFA’s definition of a prohibited “tax” is substantially broader than courts’
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`interpretation of the word “tax” under the TIA. Courts have recognized, for example, that govern-
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`ment charges that have “regulatory or punitive purposes” are not “taxes” within the meaning of
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`the TIA. Retail Indus. Leaders Ass’n v. Fielder, 475 F.3d 180, 189 (4th Cir. 2007) (quoting Valero
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`Terrestrial Corp. v. Caffrey, 205 F.3d 130, 134 (4th Cir. 2000)). In the same vein, courts have
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`recognized that charges collected “to defray the expense” of externalities are not “taxes” for TIA
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`purposes. San Juan Cellular Tel. Co. v. Pub. Serv. Comm’n of Puerto Rico, 967 F.2d 683, 685 (1st
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`Cir. 1992) (Breyer, J.) (quoting Head Money Cases, 112 U.S. 580, 590 (1884)).
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`52.
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`Government charges can “serve more than one purpose.” Austin v. United States,
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`509 U.S. 602, 610 (1993). Generally speaking, “all charges raise revenue” and bear that purpose
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`in addition to others. Am. Council of Life Insurers v. D.C. Health Benefits Exch. Auth., 815 F.3d
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`17, 19 (D.C. Cir. 2016). Thus, even charges with regulatory or punitive purposes that would fall
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`outside the TIA may also have revenue-generating purposes that bring them within the broad
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`definition of “tax” included in ITFA.
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`D.
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`53.
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`The Act is extraordinarily burdensome
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`Corporate income taxes are traditionally assessed against net income on a flat-rate
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`basis. Maryland’s corporate income tax rate is a flat 8.25% assessed against net income. Thus, a
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`global company with $15 billion in revenue and $1 billion in profits, with 2% of its revenues and
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`profits apportioned to Maryland, would pay a corporate income tax of $1.65 million on $20 million
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`of Maryland-originated pre-tax profit.
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`54.
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`The Maryland digital advertising charge applies in addition to Maryland’s standard
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`corporate income tax. If all of the revenues of the company described in the immediately prior
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`Case 1:21-cv-00410-DKC Document 1 Filed 02/18/21 Page 14 of 20
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`paragraph were derived from digital advertising, the company would be liable for an additional
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`$30 million under the Act—10% of 2% of $15 billion. That is nearly 20 times the rate of the
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`corporate income tax. And it would more than wipe out the $20 million in profits attributable to
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`the company’s economic activity in Maryland.
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`55.
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`56.
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`Assessments against gross revenues apply even to unprofitable businesses.
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`It is widely recognized that “gross revenue” is not “a usual [or] appropriate basis
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`for taxation.” USTR Report at 55. Assessments against gross revenue rather than net income are
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`therefore highly unusual in American and international law.
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`57.
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`They also create a cascading (or pyramiding) effect that embeds taxes within taxes,
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`through each stage of a production chain. For example, an advertising agency that brokers a
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`particular sale of digital advertising will be liable under the Act. So too will be the digital
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`advertising company whose services are brokered, meaning that the same digital advertising
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`service will be subjected to a double penalty of two consecutive gross-receipts charges under the
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`Act—each time at a rate that independently would often make earning a profit impossible.
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`58.
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`Several European countries, including Great Britain, France, Hungary, Italy, Spain,
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`and Turkey, have proposed or implemented digital services charges (albeit at much lower rates)
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`targeted at American digital platforms.
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`59.
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`The federal government has opposed these digital advertising charges as both
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`protectionist and a form of double taxation at odds with sound principles of taxation across
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`multiple jurisdictions. For example, federal authorities have objected to France’s digital advertis-
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`ing charge because it, like the Act, has high revenue thresholds that effectively exclude French
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`companies from the charge.
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`60.
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`The U.S. Trade Representative recently concluded that the French law, which bears
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`close resemblance to the Act at issue here, was “highly unusual” as a tax, “unfair,” “unusually
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`burdensome,” extraterritorial in scope, and discriminatory—together justifying imposing retalia-
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`Case 1:21-cv-00410-DKC Document 1 Filed 02/18/21 Page 15 of 20
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`tory tariffs. See USTR Report at 31, 49-50, 55, 65-67; id. at 1 (concluding that France’s Digital
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`Services Tax “discriminates against U.S. companies and is inconsistent with prevailing principles
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`of tax policy and unusually burdensome for affected U.S. companies”). It found in particular that
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`the French law reflects “a purpose of penalizing particular technology companies for their
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`commercial success.” Id. at 10 (citing Initiation of a Section 301 Investigation of France’s Digital
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`Services Tax, 84 Fed. Reg. 34,042, 34,043 (July 16, 2019)).
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`E.
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`61.
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`Nearly all relevant conduct takes place outside of Maryland
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`Nearly all online digital advertising services charge fees to advertising clients using
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`either the “pay per click” model (the client pays each time a user clicks on the ad) or the “cost per
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`thousand” model (the client pays for each 1,000 user impressions, regardless of clicks). Digital
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`advertising companies responsible for paying the charge imposed by the Act are sometimes unable
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`to determine where users are physically located when they click on or view an advertisement.
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`62. Many online advertisements are viewed on mobile devices. Many Maryland
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`residents commute on a daily basis to different jurisdictions, including Delaware, the District of
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`Columbia, Pennsylvania, Virginia, and West Virginia. And Maryland residents sometimes use
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`mobile devices to view advertisements while physically present in other jurisdictions.
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`63.
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`Large online digital advertising companies operating internationally have global
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`gross annual revenues that meet the threshold for the Act’s highest assessment rate, as intended by
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`the General Assembly. The Act’s high revenue thresholds exclude Maryland companies from their
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`scope, and the highest rates apply exclusively to companies located outside Maryland.
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`64.
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`The vast majority of the global gross annual revenues of large online digital
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`advertising companies are earned outside of Maryland.
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`65.
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`Advertising agencies broker ad sales for online digital advertising platforms. On
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`information and belief, all Maryland-based companies that broker sales of digital advertising
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`services have global gross annual revenues of less than $100 million.
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`F.
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`Kinds of advertising affected by the Act
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`66. Many companies use websites to deliver digit