A Maryland state tax court has struck down the state's first-in-the-nation tax on digital advertising and ordered state officials to repay the tax money already collected from major technology companies. According to reports from Associated Press, the tax court ruled that the law violates the federal Internet Tax Freedom Act as well as the First Amendment and commerce and due process clauses of the US Constitution. The court specifically ordered the state to repay the tax money already collected by Apple, Google and Peacock TV with interest, forcing Maryland taxpayers to pay the cost of their lawmakers' mistake. As reported by NetChoice, the court found that the tax conflicts with the federal Internet Tax Freedom Act (ITFA), which bars states from imposing discriminatory taxes on electronic commerce, and that it is unconstitutional under both the dormant Commerce Clause and the First Amendment because of its discriminatory design.
The digital advertising tax, approved in 2021, was designed to raise approximately ₹2,000 crore ($250 million) annually to fund a comprehensive K-12 education reform measure. According to Associated Press, the law taxed revenue that large companies make on digital advertisements shown in Maryland, with companies making more than ₹8,250 crore ($100 million) in global annual gross revenues taxed at a 2.5% rate. The tax rate increased progressively for larger companies, topping out at 10% for companies making ₹1,250 crore ($15 billion) or more in global gross annual revenues. The court's decision to void this revenue stream represents a significant financial blow to Maryland's education funding plans. The measure, which was enacted over the veto of former Governor Larry Hogan, exempts "news media entities" and "broadcast entities" that sell digital ads. In October, the comptroller's office reported it had collected more than ₹3,333 crore ($400 million) related to the tax, with funds earmarked for the state's education reform program.
The tax court found that Congress, not the state legislature, is tasked with regulating interstate commerce, and that the tax law was inappropriately based on global revenue rather than revenue from in-state advertising. As reported by Associated Press, the federal Internet Tax Freedom Act bars the taxation of e-commerce if similar services are not taxed. The court determined that there isn't much of a difference between digital advertising and print or billboard ads, meaning the taxation bar applies. In a related challenge brought by Peacock, the court separately held that the tax violates the First Amendment because it discriminates against certain broadcasters, reinforcing the broader finding that the law singles out digital services and digital speakers for disfavored treatment. The court also found that the law's exemption for news media and broadcast entities violated the First Amendment by suppressing speech that doesn't fit within the narrow definitions of "broadcast entity" or "news media entity." Portions of the law were previously struck down last year as a violation of the First Amendment by a federal appeals court.
Attorneys representing Big Tech companies including Meta and Amazon challenged the law in multiple legal venues, arguing that they were unfairly targeted. According to Associated Press, last year, the 4th US Circuit Court of Appeals ruled part of the law violated the Constitution because it blocked Big Tech companies from telling customers about the tax. Judge Julius Richardson determined that violated the right to free speech. NetChoice, alongside the U.S. Chamber of Commerce and the Computer & Communications Industry Association (CCIA), also prevailed last year in a legal challenge to the law's "pass-through" provision, which had prevented businesses from telling customers how the tax affected their advertising prices. The legal fight has been closely watched by other states considering similar online advertising taxes.
Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk, both Democrats, issued a statement saying they "respectfully disagree" with the tax court ruling and expect the legal process to continue. As reported by Associated Press, they stated the tax was enacted to keep the state's tax system in pace with a changing economy. The legislative leaders said they remain committed to ensuring Maryland's tax system is fair, sustainable, and reflects today's economy, and will continue working with the Attorney General and Comptroller as the matter proceeds through the courts. NetChoice President and CEO Steve DelBianco warned that any state tempted to try the same should understand passing an unconstitutional tax will leave a state's finances worse off. The tax's elimination comes as Maryland faces significant budget challenges, with the state projected to have a more than ₹2,500 crore ($3 billion) structural budget gap next year as more expensive parts of the Blueprint for Maryland's Future education program come online.
