Judge Strikes Down Maryland Digital Ad Tax as Unconstitutional; Appeal Still Possible

On October 17, Anne Arundel County Circuit Court Judge Alison L. Asti struck down Maryland’s tax on digital advertising. Verizon Media Inc. and Comcast challenged the law in the state’s court, via Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, No. C-02-CV-21-000509. 

The judge’s ruling cited that the controversial state law violates the U.S. Constitution’s Dormant Commerce Clause, the federal Internet Tax Freedom Act’s prohibition on discriminatory taxes on online services (insofar as Maryland does not institute a similar tax on non-digital advertising), and the First Amendment (because it is not viewpoint neutral).

After the judge’s decision, the office of Maryland Comptroller Peter Franchot said that it is “reviewing the decision and deciding next steps,” which might include a legal appeal. The Maryland Attorney General’s Office, which has defended the law in state and federal court, has called the tax a legitimate and necessary revenue-raising measure for the state’s education system.

As enacted, Maryland digital advertising tax applies to gross revenue derived from digital advertising services; it has a rate escalating from 2.5 percent to 10 percent of the advertising platform’s assessable base based on their annual gross revenues from all sources (i.e., not just digital advertising, and not just in Maryland). The graduated rate applies to tax entities with more than $1 million in gross revenues from digital advertising services in Maryland AND $100 million in annual gross revenues. However, it is not a typical progressive tax, as the rate applies to all taxed activity, not just the marginal amount. 

Maryland’s tax on digital advertising was estimated to raise $250 million a year to help pay for a sweeping K-12 education measure to expand early childhood education, increase teacher salaries, boost college and career readiness and help struggling schools.

Maryland’s digital ad tax is also being challenged in federal court by the U.S. Chamber of Commerce. Oral arguments in that case are set for November 29. The pending U.S. District Court challenge is docketed as Chamber of Commerce of the United States of America v. Peter Franchot, Comptroller of the Treasury of Maryland, No. 21-cv-410-LKG.

The legality of Maryland digital ad tax law is being watched closely by other states that have also weighed a similar tax for online ads.

The 4A’s along with many other advertising industry partners submitted comments on the proposed regulations implementing the tax. The tax took effect beginning January 1, 2022, with the first filing obligation for large taxpayers beginning in April 2022. Final regulations operationalizing the procedures for assessing tax obligations are still vague. In spite of recent unfavorable legal updates, the Maryland Comptroller’s office has taken steps earlier this year to issue the estimated tax forms needed to help covered entities to file their estimated quarterly tax payments as part of their obligations under the law.

Important for agencies, last year the legislation’s lead Senate sponsor and President of the Maryland Senate, Bill Ferguson (D-46), clarified that he doesn’t believe that the tax would be levied against a company reselling ad space to a marketer client; instead, he explained that the legislative intention of the bill is to tax the digital company selling the original advertising space (i.e. Facebook, Google, etc.). The 4A’s Government Relations team will continue to advance opportunities to codify this specific exemption through clean-up legislation or future official administrative interpretations.

For more information on Maryland’s digital advertising tax, please contact Alison Pepper.