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Maryland Digital Ad Tax Updates: Comptroller Seeks Stay of State Court Decision Striking Tax and Recently Dismissed Federal Challenge is Under Appeal

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The saga continues over Maryland’s Digital Advertising Gross Revenues Tax (Digital Ad Tax), much to the chagrin of Peter Franchot, Comptroller of Maryland, who is tasked with administering and enforcing the tax and has publicly issued concerns with the constitutionality of the tax.

On October 20, 2022, Maryland’s Circuit Court for Anne Arundel County issued a bench order granting summary judgment in favor of affiliates of Comcast Corporation and Verizon Communications Inc. striking down the Digital Ad Tax.[1] The state court struck the tax on the grounds that it violates the Supremacy Clause, Commerce Clause, and First Amendment of the U.S. Constitution, and the Internet Tax Freedom Act (ITFA).

On December 27, 2022, the Comptroller filed a motion to stay enforcement of the circuit court’s decision and a Writ of Certiorari to review the lower court’s decision with the Supreme Court of Maryland. The Comptroller argued that while the appeal is pending, the tax should continue to be enforced because the lower court’s declaratory judgment (1) inhibits the state’s ability to meet revenue expectations, and (2) is creating “uncertainty” as to whether contributions of Digital Ad Tax revenue already made to the “Blueprint for Maryland’s Future Fund” must be rescinded. The Comptroller highlighted that:

“During the first three quarters of tax year 2022, the Comptroller collected approximately $101 million in revenue from the Digital Advertising Tax, less than half the annual amount projected by the Legislature. The Comptroller’s Office has reason to believe that a number of companies subject to the Digital Ad Tax have declined to make the estimated tax payments required by Tax-General §§ 7.5-201(b), 7.5-301(b).”

On January 4, 2023, Comcast and Verizon opposed the motion to stay on the basis that the Comptroller failed to satisfy the requisite standards of relief by showing (1) that the Supreme Court of Maryland will likely reverse the lower court’s decision, and (2) that a denial of the stay would result in irreparable harm. The companies argue that the lower court’s declaratory judgment does not prevent the Comptroller from assessing the Digital Ad Tax on or after the filing deadline (April 17, 2023). Once the Comptroller issues an assessment (or denies a refund claim), taxpayers may raise the circuit court’s declaratory judgment as a defense. Comcast and Verizon also highlighted that the Comptroller’s “uncertainty” surrounding the tax is because it is “a blatantly unconstitutional tax.” The companies cited to the Comptroller’s recent press release in support, which urged state lawmakers to cease to “defend a law that was constitutionally questionable at the time of enactment.” The Supreme Court of Maryland is expected to make a decision by the end of February as to whether they will review the circuit court’s decision.

Separately, the federal challenge to the Digital Ad Tax, initiated by four trade groups (including the U.S. Chamber of Commerce) has been temporarily resuscitated following a December 2, 2022 U.S. District Court decision, which dismissed the case without prejudice on the basis that the circuit court’s declaratory judgment rendered the trade groups’ complaints moot.[2] The trade groups have appealed the U.S. District Court’s decision to the Fourth Circuit, where it is currently pending.

[1] Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et. al., v. Comptroller of the Treasury of Maryland, No. C-02-CV-21-000509 (Md. Cir. Ct. Anne Arundel County 2022).

[2] Chamber of Commerce of the United States of America, et al., v. Peter Franchot, et al., No. 1:21-CV-00410 (D. Md. 2022).

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