Maryland Court Rules Against Digital Advertising Tax

The Maryland Tax Court has invalidated the state’s digital advertising tax, mandating refunds to tech giants for taxes collected. The court determined the tax contravenes the federal Internet Tax Freedom Act and several constitutional protections, including the First Amendment.

Implemented in 2021, the tax was anticipated to generate approximately $250 million annually to fund an extensive K-12 education initiative. The law targeted large tech firms like Apple, Google, and Peacock TV, imposing a tax on revenue from digital ads shown within Maryland. Companies with over $100 million in worldwide annual revenues were taxed at a minimum rate of 2.5%, escalating to 10% for those exceeding $15 billion.

Proponents asserted that Maryland needed to update its tax system to adapt to evolving business advertisement strategies. However, major tech companies, including Meta and Amazon, legally opposed the tax, claiming discriminatory practices.

The 4th U.S. Circuit Court of Appeals previously judged a portion of the law unconstitutional, noting it unlawfully prohibited tech firms from informing customers of the tax. This ruling was based on free speech rights, as described by Judge Julius Richardson.

Despite the tax court’s decision, Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk, both Democrats, expressed disagreement and intend to pursue the case further. They emphasized the necessity of adapting the state’s tax system to the contemporary economy, pledging continued collaboration with the Attorney General and Comptroller.

The tax court highlighted that regulating interstate commerce falls under Congress’s jurisdiction, criticizing the tax’s reliance on global revenue metrics instead of in-state ad earnings. The federal Internet Tax Freedom Act prohibits the taxation of e-commerce when equivalent non-digital services remain untaxed. The court found little distinction between digital and traditional advertising, thus confirming the restriction on such taxes.