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Advocates of states mimicking Maryland’s first-in-the-nation digital advertising tax legislation might be tempted to celebrate the Maryland Supreme Court reversing a lower court ruling throwing out the tax. But the reality is while Maryland won a short reprieve on the basis of legal technicalities, states thinking this ruling gives them a green light to tax digital advertising are in for a rude awakening.

Maryland first passed its digital advertising tax into law back in early 2021, having to override then-Governor Larry Hogan’s veto to do so. After a delay in implementation, the law went into effect at the beginning of 2022. 

In essence, it created a graduated gross receipts tax on digital advertising revenue from Maryland consumers on any business with over $100 million in global digital advertising revenue — meaning that it does not necessarily have to be revenue earned in Maryland to count towards this threshold. As the gross receipts tax rate taxes all revenue, not just profit, and rises as high as 10 percent, any business with a digital advertising profit margin below 10 percent on Maryland consumers would actually be losing money by doing business in Maryland.

Legal and constitutional issues with this law abounded, leading Anne Arundel County Circuit Court Judge Alison Asti to strike down the tax in October of 2022. Judge Asti ruled, accurately, that the tax violated the Commerce Clause and the First Amendment of the Constitution, as well as the Internet Tax Freedom Act (ITFA).

By setting the $100 million threshold so high but including revenue earned elsewhere, Maryland purposely designed the tax so that it would apply to corporations with most of their activity outside of Maryland, but would not apply to Maryland-only businesses. In other words, it was a rather naked attempt to import tax revenues from other states. The Commerce Clause of the Constitution exists in large part to ensure that states do not do this, as it has an extremely harmful effect on the broader national economy.

Maryland’s tax was also a blatant violation of ITFA, part of which prohibits states from imposing discriminatory taxes on digital commerce that do not apply to traditional counterparts. Maryland does not tax traditional advertising, such as in print newspapers or billboards, at all, rather clearly violating ITFA.

While the fact that a tax can violate the First Amendment may seem counterintuitive, courts have consistently ruled that taxes which specifically target news outlets’ revenue sources violate the First Amendment. As so many news organizations rely heavily on digital advertising to stay afloat, Judge Asti likewise ruled that Maryland’s digital advertising tax violates the First Amendment.

Unfortunately, back in May the Maryland Supreme Court reviewed Judge Asti’s ruling and overturned it. However, the Maryland Supreme Court has since made it clear its reversal was not because it disagreed with Judge Asti’s opinion on the merits, but rather a technical decision that the businesses suing Maryland did not first exhaust administrative remedies. Never mind that Maryland is hardly likely to agree that its actions are unconstitutional, the ruling allows Maryland to go back to enforcing its unconstitutional tax while companies remain mired in a bureaucratic rigmarole.

But that’s not really a win for anyone — not even Maryland, which remains stuck with a lame duck tax that is almost certainly legally doomed at some point and sets the state up as clearly business-unfriendly in the meantime. It certainly should not suggest to other states that they can copy Maryland’s tax without legal consequences. 

It’s always frustrating when taxpayers are forced to comply with irrational and unconstitutional government requirements while they await judicial intervention, but the lesson for states should remain unchanged: Maryland’s digital tax, and any that seek to copy it, are doomed. It’s only a matter of “when.”


Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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