Maryland’s Discriminatory Digital Ad Tax Found Unconstitutional

Earlier this week, a Maryland court struck down the state’s digital advertising tax scheme. In an expansive ruling, Anne Arundel County Circuit Court Judge Alison Asti sided with plaintiffs challenging the tax on the basis of the First Amendment, the Commerce Clause, and the federal Permanent Internet Tax Freedom Act. 

Going into effect at the beginning of this year, Maryland’s digital advertising tax created a graduated gross receipts tax.Rates for the tax depended on the business’s digital advertising activities worldwide — not just Maryland-sourced receipts. A business facing the highest tax bracket would have to have a 10 percent profit margin just to break even.

The tax was originally passed by the Maryland state legislature in 2020, overriding Governor Larry Hogan’s veto in early 2021. Subsequent legislation delayed the law’s implementation until 2022, as well as adding in an impossible-to-enforce prohibition against businesses passing on the tax to customers — a notion akin to trying to prohibit interest rates from having an effect on inflation.

NTUF has many times detailed the legal issues this law faced, issues that Judge Asti recognized in her decision. First, the law violates the Permanent Internet Tax Freedom Act, which prohibits states from taxing digital goods and services while leaving non-digital equivalents untaxed. The gross receipts tax at issue applies solely to digital advertising services — in fact, Maryland does not tax traditional advertising services at all.

Judge Asti also agreed that Maryland’s law represents a violation of the Commerce Clause of the Constitution. Because of how the law is structured — particularly in basing rates upon total, worldwide digital advertising receipts — it is designed to fall almost entirely upon businesses that do not operate solely in Maryland. (This was a deliberate goal of the sponsors.)  It thus intentionally exports tax burdens out-of-state. Such efforts are little different from state-level tariffs.

Lastly, Judge Asti found that the Maryland digital advertising tax violates the First Amendment. Both U.S. Supreme Court and Maryland state legal precedent suggest that taxes that target the news media represent unconstitutional violations of the First Amendment. As Maryland’s digital tax falls heavily upon a key source of revenue for news publications, Judge Asti found that this was one such tax.

Though it is possible that Maryland will appeal, states considering similar discriminatory taxes against digital goods and services should take this as a significant rebuke. The digitization of the economy is no reason to create new and punitive taxes. States should endeavor to treat digital goods and services as identical for tax purposes to their traditional counterparts.