MD Court Strikes Down First-of-its-Kind Digital Ad Sales Tax

A first-of-its-kind state tax on some digital ads has been struck down as a violation of the federal Internet Tax Freedom Act by the Maryland Tax Court.

The decision issued Friday morning was in response to three legal challenges filed by Apple, Google and Peacock TV, a streaming service.

“In the context of the ITFA (Internet Tax Freedom Act) … the Court reasons that Congress could not have been any clearer that it did not want internet services of any kind taxed unless other similar services in the broader sense were taxed,” the tax court wrote.

“Using a common-sense approach to define and distinguish digital advertising services from non-digital, the Court finds that currently, in the advertising industry, in academia, and in Maryland households, the provision of digital advertising services is indistinguishable from the provision of non-digital advertising services; they are even more aligned than ‘similar,’” the ruling said. “This perception may change over time as new technologies, capabilities, and public education develop and prosper, but that is the current state of affairs.”
The court added in a footnote that the tax could be viewed as an attempt to impose a tax on large companies even though much of the earnings came from outside the state.

In its ruling, the court orders the state to refund the taxes collected plus interest. Comptroller Brooke Lierman, in a statement, signaled a potential appeal the ruling.

“The Maryland Tax Court, an administrative agency, struck down Maryland’s Digital Advertising Tax.” Lierman said in a statement. “I respect but strongly disagree with the decision. I will continue to work with the Attorney General of Maryland in defending this important law, which aligns Maryland’s tax code with the reality of today’s economy, ensures that the country’s biggest tech companies pay their fair share, and provides essential support to Maryland’s public school systems.”

Lierman’s office said the state had collected about $535.5 million under the tax through July, but that money has not been spent. It’s been fenced off from other funds, pending the outcome of these cases.

All three companies petitioned the court for a refund of taxes paid related to the digital ad tax. The companies argued that the Internet Tax Freedom Act prohibited taxing online commercial activity when similar non-digital activity was not taxed. The court agreed.

“There is no statewide Maryland tax on advertising services that are not digital, such as those involving billboards, magazines, newspapers, direct mail, and other printed media, and even broadcast radio and broadcast television,” the court wrote.

The court issued three decisions, one for each case, but noted that while there were differences in the arguments, the three rulings were similar.

In the ruling on the case filed by Peacock, the court found First Amendment violations, saying the law illegally treated digital streaming services different from other broadcasters.

“When the Maryland General Assembly was considering this tax, we told them it was unlawful and unconstitutional — and they passed it anyway,” said Steve DelBianco, President and CEO of NetChoice, an industry group that counts Meta, X and Google as members. “Now the state has to return the taxes it collected, forcing Maryland taxpayers to pay the cost of their lawmakers’ mistake. Any state tempted to try the same should understand passing an unconstitutional tax will leave a state’s finances worse off.”

The three companies may have to wait a bit longer for refund checks. The state has 30 days to appeal the tax court’s ruling in circuit court. From there, it could move through the state’s appellate court system.

In a joint statement, House Speaker Joseline Peña-Melnyk (D-Prince George’s and Anne Arundel) and Senate President Bill Ferguson (D-Baltimore City) said the tax was enacted to keep pace with a changing economy.

“As more commerce and advertising moved online, it was appropriate to modernize our tax code so that large digital advertising companies contributed alongside other businesses operating in our state,” the legislative leaders said in their statement. “We remain committed to ensuring that Maryland’s tax system is fair, sustainable, and reflects today’s economy. We will continue working with the Attorney General and Comptroller as this matter proceeds through the courts.

Ferguson was a sponsor of the 2021 law.

Republicans objected to the proposal, calling it unconstitutional. Then Gov. Larry Hogan (R) vetoed it only to see the House and Senate, both of which are controlled by a supermajority of Democratic lawmakers, override him.

“Today’s ruling confirms that those warnings were not political rhetoric, they were well founded,” said Senate Minority Leader Stephen S. Hershey Jr. (R-Upper Shore) in a text message to Maryland Matters.

“The lesson here should be simple: When legislators are warned that a tax is unconstitutional, passing it anyway does not make the constitutional problem disappear. It merely postpones the day of reckoning — and leaves Maryland taxpayers to pick up the bill,” he wrote.

The law has been the subject of multiple state and federal court challenges since it was enacted.

Portions of the law were struck down last year as a violation of the First Amendment by a federal appeals court.

The 2021 law targets big tech firms including Apple, Meta and Google.

Under the law, companies reporting gross global annual revenue of at least $100 million are subject to a 2.5% levy. The tax increases in increments of 2.5% to a maximum rate of 10% levied against companies reporting more than $15 billion in gross global revenue.

The state could collect as much as $250 million annually from the digital ad tax, according to a legislative analysis. The funds are earmarked for the state’s education reform program.

In October, the comptroller’s office reported it had collected more than $400 million related to the tax.

Money collected from the tax was supposed to offset costs of the ever expensive Blueprint for Maryland’s Future education program. Costs for that program are responsible for driving billions of dollars in projected state structural budget  gaps. Next year, the state will have to tame a more than $3 billion projected gap as more expensive parts of the program come online.

A spokesperson for Ferguson, a sponsor of the 2021 bill, was not immediately available for comment.

But Doug Mayer, president of Americans for Digital Opportunity, hailed the decision.

“Today’s ruling validates what every person with the most basic understanding of tax law has been saying for over six years — digital advertising taxes are illegal on multiple levels,” Mayer said. “If elected officials really want to increase revenue, they should be empowering entrepreneurs, not concocting illegal taxes that stifle much of what is powering so much of the economy.”

Bryan Sears covers the governor and General Assembly, state politics and transportation for Maryland Matters.