Maryland Court Invalidates Maryland’s First-of-Its-Kind Digital Ad Tax

A Maryland state court struck down the state’s Digital Advertising Gross Revenues Tax (“Digital Ad Tax”) as invalid under both the federal Internet Tax Freedom Act (“ITFA”) and U.S. Constitution.

Enacted February 12, 2021, Maryland’s Digital Ad Tax by its terms applies to any person with at least $1 million of annual gross revenues from digital advertising services in Maryland and global annual gross revenues of at least $100 million.  The tax applies broadly to “digital advertising services,” including banner advertisements, search engine advertisements, interstitial advertisements, and other comparable advertising services accessed on a digital interface in Maryland.  The Digital Ad Tax is imposed on revenue derived from digital advertising services in Maryland and applies at rates increasing from 2.5% to 10% depending on the taxpayer’s global annual gross revenue, regardless of where the revenue is earned.

On April 15, 2021, affiliates of Comcast Corporation and Verizon Communications Inc. filed suit in Maryland state court to challenge the validity of the tax.  The plaintiffs’ primary arguments are that the tax violates: (1) ITFA, which prohibits taxes that discriminate against electronic commerce by taxing business models transacted over the Internet but not taxing similarly situated business models not transacted over the Internet; (2) the U.S. Constitution’s Commerce Clause, which prohibits taxes that discriminate against interstate commerce; and (3) the U.S. Constitution’s First Amendment, which prohibits laws that infringe freedom of speech.

On October 17, 2022, following a two-hour hearing, Associate Judge Alison L. Asti granted the plaintiffs summary judgment.  In the oral bench ruling, the court agreed with the plaintiffs that the Digital Ad Tax violates both ITFA and the U.S. Constitution.  The court found as follows:

  • First, the tax is discriminatory in violation of ITFA because the tax applies to Internet advertising services but not to traditional advertising services.
  • Second, the tax violates the Commerce Clause because the tax rate increases as a taxpayer’s activities outside Maryland increase.
  • Finally, the tax violates the First Amendment because it infringes free speech by exempting traditional broadcast and news media but applying to comparable Internet speech.

The court indicated that it would issue a formal written order and release a transcript of the hearing but may not issue a full written decision. Comcast of California/Maryland/ Pennsylvania/Virginia/West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-CV-21-000509.