A Maryland Circuit Court invalidated the State’s tax on digital advertising (Maryland Digital Advertising Tax) on October 21, 2022.
The digital advertising tax was enacted in 2021 after the Maryland House of Delegates and Senate overrode Governor Hogan’s veto of the bill. The first-of-its-kind law imposes a tax of between 2.5% and 10% of gross revenue derived from digital advertising.
In April 2021, seven divisions of Comcast and Verizon filed the lawsuit in Maryland Circuit Court challenging the enacted law under the Internet Tax Freedom Act (ITFA) and the US Constitution’s due process, commerce clause, and the First Amendment. The judge issued a bench opinion finding the law unconstitutional and in violation of the ITFA.
The decision has larger implications than how digital advertising is taxed by Maryland. The ITFA was originally enacted in 1998 and permanently extended in 2016 to provide a moratorium on both new state taxes and multiple or discriminatory taxes on electronic commerce. The ITFA rules prohibit a state from enacting:
a tax that results in the same internet transaction being subject to taxation in more than one jurisdiction without an offsetting credit;
a tax imposed on internet transactions that is not imposed on transactions accomplished through other means;
a tax that imposes a higher rate of tax on internet transactions than is imposed on transactions accomplished through other means; or
a tax that imposes any collection or payment obligations for internet transactions that are different from the collection and/or payment obligations on transactions accomplished through other means.
With the increasing importance of digital commerce and this ruling, the consideration of ITFA will play an increasing role for other states that are expecting to tax digital commerce. In turn, ITFA and digital commerce will impact potential litigation involving state and local taxes.
Maryland Comptroller Franchot has urged the incoming Governor and General Assembly to revisit this tax. Franchot noted that the unconstitutionality, combined with the impact on small businesses, continues to “give (him) pause.”