Judge Blocks Taxpayer Challenge to Maryland Digital Ad Tax


A federal judge has blocked a challenge to Maryland’s new digital ad tax, a new levy of up to 10 percent of large companies’ gross receipts derived from digital advertising in Maryland. Sponsors designed the punitive tax to target large out-of-state companies, and it was passed in 2021 over the veto of Governor Larry Hogan (R).

Maryland had argued any challenge to the law was barred by the Tax Injunction (TIA), a federal law that stops federal courts from halting “assessment, levy, or collection of any tax” if a state has a “plain, speedy, and efficient” remedy. Plaintiffs, led by the U.S. Chamber of Commerce, argued the TIA did not apply because Maryland did not offer such a remedy, and because the punitive goals of Maryland’s law made it more like a penalty than a tax.

The judge agreed with the state that the levy is a tax for TIA purposes, not at all wrestling with the evidence Plaintiffs brought about legislators’ punitive intent. The judge analyzed Maryland’s state court remedies and found them adequate, even though a similar case in state court continues to languish while state attorneys dispute whether taxpayers have standing to challenge it. While the judge’s overly broad reading of the TIA to essentially insulate dubious tax laws from taxpayer challenge was rejected by the U.S. Supreme Court last year, it remains a common obstacle taxpayers face in federal courts.

The judge therefore granted the defendants’ requested motion to dismiss, except as to one area. The Maryland law includes a bizarre prohibition on passing the tax forward to others, forbidding the paying advertising companies from charging the tax to their customers. While all business taxes are "paid" by the business, the incidence of these taxes ultimately falls upon someone else. The taxes businesses pay result in some combination of reduced investment or dividends, lower wages, and higher prices. Banning those things from happening is like banning gravity. Banning companies from listing the taxes they pay on invoices may also by itself violate the First Amendment and other constitutional provisions. The judge ruled that part of the case can go forward.

The parties have until April 4 to decide whether to proceed with the case or appeal. NTUF is monitoring the case closely and will file in support of the taxpayers’ position if the case is appealed.

The case is Chamber of Commerce, et al. v. Franchot, E.D. Md. No. 21-cv-00410-LKG.