A federal judge recently ruled in favor of Maryland in the ongoing dispute over the state’s digital advertising tax. The tax, which targets large online platforms generating significant State revenue from digital advertisements, faced strong opposition from industry groups, including the US Chamber of Commerce and several trade associations.

As previously reported on Conduit Street, enacted by the General Assembly in February 2021 following an override of a veto by former Governor Larry Hogan, the digital advertising services tax applies to annual gross revenues derived from digital advertising services in Maryland by businesses with at least $100 million in global annual gross revenues. The tax rate ranges from 2.5 to 10 percent, depending on the global annual gross revenues of the business.

Under one set of assumptions, the taw could raise $250 million annually from massive corporations and advertisers like Google and Facebook to help fund the Blueprint for Maryland’s Future, a multi-year, multi-billion dollar investment in Maryland schools.

Legal Challenges

The US Chamber of Commerce and several other trade associations challenged the tax, arguing that the law’s “Pass-Through Prohibition” violated the First Amendment.

The Pass-Through Prohibition in Maryland’s digital ad tax law prevents companies from directly passing the tax cost onto their customers through separate fees or surcharges. While companies can adjust their overall pricing strategies to account for the tax, they cannot add a specific surcharge to cover the tax.

Federal Court Ruling

In Chamber of Commerce of the United States of America v. Lierman, the United States District Court for the District of Maryland acknowledged that the tax partially restricts companies’ speech by regulating how they can pass on the tax to customers.

However, US District Court Judge Lydia Kay Griggsby ruled that the plaintiffs failed to prove this measure was wholly restrictive and unconstitutional. As such, the court found that the regulation was focused on conduct rather than speech, meaning it did not fully infringe on First Amendment rights.

State Court Actions and Maryland Tax Court

While the federal ruling is a significant victory for Maryland, the legal battle is not over. State-level challenges remain pending, focusing on the tax’s compliance with state laws and the Commerce Clause.

The Maryland Supreme Court recently overturned a lower court ruling that struck down the tax, but this decision was procedural. It emphasized that the plaintiffs had not exhausted administrative remedies, such as presenting their case to the Maryland Tax Court.

Several plaintiffs have cases pending before the Maryland Tax Court, an independent agency that provides the highest administrative level in the state and local tax-related appeals process.

Implications for Maryland and Beyond

The judge’s decision allows Maryland to continue implementing the tax and may set a precedent for other states considering similar measures to tax digital advertising revenues.

Useful Links

For further details on the ruling, please refer to the full memorandum opinion linked here.

Previous Conduit Street Coverage:

Judge Strikes Down Maryland’s Digital Advertising Tax

MD Supreme Court Reverses Lower Court, Upholds State’s Digital Ad Tax