A Maryland court has struck down the state’s first-in-the-nation tax on digital advertising, ruling in favor of Apple, Google, and Peacock TV and ordering the state to refund taxes already paid by the companies.
The tax, approved in 2021, was designed to raise hundreds of millions of dollars for public schools by taxing online ads sold by big tech companies. On Friday, the Maryland Tax Court ruled the tax violates the federal Internet Tax Freedom Act, as well as the First Amendment and the commerce and due process clauses of the U.S. Constitution.
How It Worked
Companies making more than $100 million in global annual gross revenues were taxed at a 2.5% rate. The rate increased for companies with larger revenues, topping out at a 10% rate for companies making $15 billion or more.
Supporters of the law contended Maryland needed to overhaul its tax methods in response to significant changes in how businesses advertise. But attorneys representing Big Tech companies, including Amazon and Meta, challenged the law in multiple legal venues, arguing in part that they were unfairly targeted.
The Legal Rulings
The Maryland Tax Court said the tax violates the federal Internet Tax Freedom Act, which bars the taxation of e-commerce if similar services are not taxed. At least for now, the tax court found, there isn’t much of a difference between digital advertising and print or billboard ads, which means the bar on taxation applies.
The court also said Congress — not the state legislature — is tasked with regulating interstate commerce, and that the tax law was inappropriately based on global revenue rather than revenue from in-state advertising.
Last year, the 4th U.S. Circuit Court of Appeals ruled part of the law violated the Constitution because it blocked Big Tech companies from telling customers about the tax. That, Judge Julius Richardson said, violated the right to free speech.
The Reaction
Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk, both Democrats, issued a statement saying they “respectfully disagree” with the tax court ruling and expect the legal process to continue.
They said the tax was enacted to keep the state’s tax system in pace with a changing economy. “We remain committed to ensuring that Maryland’s tax system is fair, sustainable, and reflects today’s economy,” they said. “We will continue working with the Attorney General and Comptroller as this matter proceeds through the courts.”
The Bottom Line
Maryland’s first-in-the-nation digital ad tax has been struck down by a state court, which ordered refunds for Apple, Google, and Peacock TV. The tax, approved in 2021, was designed to raise hundreds of millions for public schools. The court ruled it violates federal law and the Constitution. State leaders say they will continue the legal fight.
