Maryland Court Strikes Down Digital Ad Tax

In a written order issued on October 20, 2022, a Maryland circuit court granted summary judgment against the state of Maryland, ruling that the state’s Digital Advertising Gross Revenues Tax (Digital Ad Tax) is unconstitutional and violates the Internet Tax Freedom Act (ITFA), effectively striking down the tax. The judge’s decision was initially issued as a bench order after a two-hour hearing held on October 17, 2022. The written order states that the Digital Ad Tax violates the ITFA, the First Amendment, and the Commerce Clause.

The Maryland General Assembly overrode the governor’s veto in 2020, making Maryland the first state in the nation to impose a tax on digital advertising services. In 2021, the tax was amended to prohibit businesses from directly passing on the cost of the taxes to customers.

On October 20, 2022, the Comptroller of Maryland, Peter Franchot, issued a statement on the ruling urging Maryland to give up the fight for now:

"As Comptroller and the state’s chief fiscal officer, I firmly believe that instead of continuing to expend public resources to defend a law that was constitutionally questionable at the time of enactment, the incoming governor and the incoming legislature should instead be given the opportunity to revisit this law."

Insights

• The order itself is not surprising as many practitioners believe the tax is unconstitutional and violates federal law.
• Reports have indicated that the president of the Maryland senate would like to appeal the case or amend the legislation and that the attorney general, who would handle the appeal, plans to do so.
• The judge’s decision was initially issued via a bench order. The bare-bones written order does not include much of the judge’s thought process behind her reasoning that the tax is unconstitutional and violates ITFA. As a result, practitioners could look to the plaintiff’s briefs or wait for an appellate-level opinion to make similar challenges to other tax regimes.
• The U.S. Chamber of Commerce also brought a separate challenge in federal court. (Chamber of Commerce of the United States of America v. Franchot, Civil Action No. 21-cv-00410-LKG (D. Md. March 4, 2022)). In the federal case, the U.S. District Court for the District of Maryland concluded that the Tax Injunction Act barred the challenge in federal courts. However, the judge did rule that businesses could challenge the provision prohibiting them from directly passing the cost of the tax to their customers. The lone remaining issue of that challenge is still pending in federal court.
• Will this Maryland ruling stop other states from implementing a similar tax? Will those states wait for an appellate court ruling in their favor before implementing a similar tax? Only time will tell. However, states have been consistently creative in trying to find ways to tax the digital economy.

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