The U.S. Court of Appeals for the Fourth Circuit has handed down its opinion on the federal challenge to the Maryland digital ad tax. (There's a separate state challenge proceeding in state court.) Short summary: neither side wins, more litigation needed.
The court agrees with the district court that the Internet Tax Freedom Act, Commerce Clause, and Due Process Clause challenges to the Maryland law cannot be heard in federal court as barred by the Tax Injunction Act (TIA). Applying the factors from Valero Terrestrial Corp. v. Caffrey – who imposes the charge (the state or a regulator), what population is subject to it (many or few), and what purposes are served by the use of the money (general purposes or specific purposes) – they conclude it is a tax.
Intriguingly, they note that the precise number of who will be subject to the charge “is unclear from the record,” perhaps giving an opportunity to the challengers if fact-finding shows the number of companies subject to the tax is indeed “few” and not “many.” Additionally, the court notes that the dismissal should have been "without prejudice" not "with prejudice" to allow the challengers to proceed in state court.
However, the First Amendment challenge to the law's "pass-through prohibition" (banning companies from putting the tax on customer bills) is not barred by the TIA, as that is speech or conduct with “no bearing on the underlying tax.” The lower court dismissed that claim as moot, since a state court had invalidated the entire tax. But that was an error, the Fourth Circuit today ruled, because appeals could happen. And indeed did, that state decision was reversed on jurisdiction grounds.
The Fourth Circuit declined to decide that First Amendment challenge completely, saying further fact-finding may be warranted. So they remand it back to the district court to decide.
While the TIA portion of the opinion is unfortunate – it is a strange position where the only way to challenge a new tax’s constitutionality is after years of paying it and litigation in state court – the First Amendment portion is good news. It is important for government transparency nationwide that the law not make businesses tell consumers that they are not paying a tax that they economically very much are.
The case is Chamber of Commerce v. Lierman, 4th Cir. No. 22-2275.