Maryland’s Landmark Digital Ad Tax Overturned by State Court

The Maryland Tax Court has invalidated the state’s pioneering tax on digital advertising. This directive requires state officials to return taxes collected from major tech firms. The court found that the tax violates the federal Internet Tax Freedom Act, the First Amendment, and the commerce and due process clauses of the U.S. Constitution.

This ruling holds significance as other states contemplate similar taxes on online advertisements. The tax, introduced in 2021, aimed to generate approximately $250 million annually to support a comprehensive K-12 education initiative.

On Friday, the tax court ruled in favor of companies like Apple, Google, and Peacock TV, ordering Maryland to reimburse taxes they had paid. The legislation targeted revenue from digital ads viewed in Maryland, imposing a 2.5% tax on companies earning over $100 million globally, with rates rising to 10% for companies with annual revenues exceeding $15 billion.

“We remain committed to ensuring Maryland’s tax system is fair, sustainable, and reflects today’s economy,” stated Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk. “We will continue working with the Attorney General and Comptroller as this matter proceeds through the courts.”

This statement followed their expressed disagreement with the court’s decision. They argue the tax was necessary to adapt to the evolving economy.

Attorneys for Big Tech, including Meta and Amazon, contested the law, citing unfair targeting. Last year, the 4th U.S. Circuit Court of Appeals ruled that parts of the law infringed on constitutional rights by preventing companies from informing customers about the tax. Judge Julius Richardson noted this suppressed free speech rights.

The tax court emphasized that regulating interstate commerce is Congress’s responsibility, not the state’s. The law in question was challenged for being based on global revenue instead of revenue from in-state ads. The Internet Tax Freedom Act prohibits e-commerce taxes unless similar offline services are taxed. Currently, the court sees no distinct difference between digital and traditional advertising like print or billboards, enforcing the ban on taxation.