Court Saga Over Maryland Digital Advertising Tax Continues
The court saga over Maryland’s first-in-the-nation digital advertising tax continued this month after the Maryland Supreme Court issued its ruling in Comptroller v. Comcast of Cal., et al. ordering more administrative process in the state court legal challenge.
The tax is a graduated gross receipts tax on digital advertising revenue from Maryland consumers on any business with over $100 million in global digital advertising revenue. The tax rate rises to as high as 10 percent, meaning any business with a profit margin below 10 percent on Maryland consumers will lose money by doing business in Maryland. Maryland’s law also attempts to prohibit providers from passing the tax onto customers, gave little clarity about how companies should properly apportion taxable revenue to different states, and differentially taxed digital advertising versus non-digital advertising in violation of the federal Internet Tax Freedom Act (ITFA).
Two lawsuits ensued, one brought by Comcast in Maryland state court. Last October, the trial judge ruled that the tax violates the Internet Tax Freedom Act, the Commerce Clause, and the First Amendment.
The Maryland Supreme Court reversal of this ruling in May, which was now clarified by the full opinion, is based on a technicality: The court held that the companies failed to exhaust administrative remedies, including getting a ruling from the state’s Tax Court. Taxpayers can either (1) pay the tax, file for a refund, wait for Maryland to decide if it gets a refund, appeal the decision within 30 days to the Tax Court, then wait for a decision from the Tax Court, and only after that point may it file in court; or (2) refuse to pay the tax, wait for a notice of deficiency, and then appeal the notice to the Tax Court (all while incurring penalties on the unpaid tax), and then file in court. Either way, we would all have to wait years as this legal process plays out.
The case in federal court, Chamber of Commerce of the United States v. Lierman, is ongoing. The federal judge held that it could not hear the case due to the federal Tax Injunction Act (TIA) and declined to consider the First Amendment challenge, calling it moot because of the state court ruling striking the tax down. The Chamber has appealed to the U.S. Court of Appeals for the Fourth Circuit, which will hear arguments in September 2023. Stay tuned.