Maryland Tax on Digital Advertising Overturned by State Tax Court

The Maryland Tax Court has invalidated the state’s pioneering tax on digital advertising. It has also directed state officials to refund the collected taxes to major tech companies. The court found that the tax contravened the federal Internet Tax Freedom Act, as well as the U.S. Constitution’s First Amendment and commerce and due process clauses.

Many other states were closely observing Maryland’s legal battle as they consider similar taxation on online advertising. The tax, introduced in 2021, was projected to generate approximately $250 million annually to fund a comprehensive K-12 education initiative.

In its decision, the tax court ordered a refund to tech giants such as Apple, Google, and Peacock TV. The law applied a tax on revenues from digital advertisements shown in Maryland, targeting companies with over $100 million in global annual gross revenues at a 2.5% rate. This rate escalated for companies with higher revenues, reaching up to 10% for those with $15 billion or more in global annual revenues.

Proponents of the law argued for a revision of Maryland’s tax system to accommodate shifts in business advertising practices. Attorneys representing companies such as Meta and Amazon opposed the law, claiming it unfairly singled them out. Last year, the 4th U.S. Circuit Court of Appeals determined part of the law unconstitutional for preventing these companies from informing customers about the tax, thus infringing on free speech. Judge Julius Richardson highlighted this violation.

Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk, both Democrats, expressed their disagreement with the court’s ruling. They anticipate further legal challenges, maintaining that the tax was crucial for adapting the state’s tax system to the evolving economy. They pledged to collaborate with the Attorney General and Comptroller as the case progresses in the courts.

The tax court emphasized that regulating interstate commerce falls under Congress’s jurisdiction, not that of state legislatures. The tax law’s focus on global revenue rather than local advertising revenue was deemed inappropriate. Moreover, the federal Internet Tax Freedom Act prohibits the taxation of e-commerce services if similar offline services remain untaxed. Currently, digital advertising does not differ significantly from print or billboard ads, indicating that the restriction on taxation applies.