No Taxation if there is Discrimination: Maryland’s Trailblazing Digital Advertisement Tax Struck Down as Unconstitutional

Maryland’s digital advertising tax was recently challenged in court and struck down as unconstitutional and discriminatory.[1] In response, the Maryland attorney general appealed the decision on November 21, 2022.[2] Maryland became the first state in the nation to impose a tax on the sale of online advertisements.[3] The bill went into effect on March 14, 2021, after the Maryland General Assembly overrode Governor Larry Hogan’s veto.[4] The bill imposed a progressive tax rate based on a business’s gross annual income that would levy between 2.5% and 10% per online advertisement.[5]

Proponents of the bill argued that the tax reflected the economy’s progression by only applying the tax to companies earning more than $1 million in annual gross revenue, and that the $250 million in revenue that the tax was estimated to generate for the state would greatly help with the overhaul of public education.[6] Those opposed to the digital ad tax, including Governor Hogan, argued that the bill would hurt small businesses because large companies, such as Google and Facebook, would simply pass the costs onto these small businesses that rely on digital advertisement.[7] A week after the tax was passed, the first lawsuit challenging the digital advertisement tax, Chamber of Com. of U.S. v. Franchot, was initiated in federal court.[8] On April 15, 2021, Comcast and Verizon similarly filed a lawsuit in the Circuit Court of Anne Arundel County alleging that the bill violated the Internet Tax Freedom Act (“ITFA”), the First Amendment of the United States Constitution, the Dormant Commerce Clause, and the Due Process Clause.[9] The ITFA prevents “states and localities from imposing discriminatory taxes on electronic commerce.”[10] On October 17, 2022, Judge Alison Asti struck down the tax as unconstitutional and granted summary judgment in favor of Verizon and Comcast.[11]

While delivering her decision from the bench, Judge Asti, stated that the bill violated the ITFA because Maryland does not similarly tax non-digital advertising and therefore it discriminated against e-commerce.[12] Judge Asti also found that the digital advertising tax violated the First Amendment of the Constitution because the bill was not viewpoint neutral since it applied to companies like Facebook and Google and exempted news organization’s online websites.[13] Additionally, the circuit court judge also found that the tax violated the Dormant Commerce Clause because it impermissibly imposed a state regulation on commerce.[14]

If the County Circuit Court for Anne Arundel County’s decision is upheld on appeal, then the attempts of other states to pass similar legislation will also likely fail on similar unconstitutional grounds; however, if the Maryland tax survives judicial scrutiny, then it will likely result in the increase in vague tax laws in other states and subsequent interstate battles.[15] Since this case is one of first impression, it was foreseeable that it would undergo a lengthy legal journey,[16] and with an ongoing federal case, Chamber of Com. of U.S. v. Franchot, which poses similar questions, it is likely that this issue is far from resolved.[17]

Emily Thompson is a third-year law student at the University of Baltimore School of Law and an Associate Editor for Law Forum. She earned her Bachelor’s of Science degree in psychology and a minor in theology from Loyola University of Chicago. In the past, Emily has worked as a Law Clerk at Hassan, Hassan & Tuchman, P.A. and as a legal extern at Sylvan Learning. Currently, she is a research assistant for Professor Oppenheimer and in the Spring she will serve as a Rule 19 student attorney with school’s Civil Advocacy Clinic. Upon graduation, Emily will serve as a Judicial Law Clerk for the Honorable Judge Michael J. Finifter in the Circuit Court for Baltimore County. She hopes to pursue a career in civil litigation and advocacy.

[1] Dick Uliano, Judge Rejects Maryland’s Digital Ad Tax, WTOP News (Oct. 17, 2022, 8:17 PM), https://wtop.com/anne-arundel-county/2022/10/judge-rejects-marylands-digital-ad-tax/.

[2] Andrew Harrer, Maryland AG Files Appeal to Revive Digital Advertising Tax, Bloomberg Law (Nov. 23, 2022, 12:41 PM), https://news.bloombergtax.com/daily-tax-report-state/maryland-ag-files-appeal-to-revive-digital-advertising-tax.

[3] Jason R. Brown, The Maryland Digital Advertising Services Tax and the Expanding Map for Digital Taxes, Am. Bar Ass’n Tax Times (June 10, 2021), https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/21spr/21spr-pop-brown-md-digital-tax/#_ftnref2. 

[4] H.D. 732, 2020 Leg., 441st Sess. (Md. 2020).

[5] Id.; Martin Austermuhle, Maryland to Become First State to Tax Online Ads Sold by Facebook and Google, NPR (Feb. 15, 2021), https://www.npr.org/local/305/2021/02/15/968079442/maryland-to-become-first-state-to-tax-online-ads-sold-by-facebook-and-google; H.D. 732, 2020 Leg., 441st Sess. (Md. 2020). Under the bill’s framework, companies selling online advertisements with a gross revenue of at least $100 million would be taxed 2.5%, while those with a gross revenue of more than $1 billion would be taxed 5%. Id. Additionally, companies with a gross revenue of more than $5 billion would be taxed 7.5%, and a company with $15 billion or more in gross revenue, such as Facebook and Google, would be taxed 10%. Id.

[6] Austermuhle, supra note 5.

[7] Id.

[8] Id.; Chamber of Com. of U.S. v. Franchot, Civil Action 21-cv-00410-LKG (D. Md. Mar. 30, 2022).

[9] Id.; Callan Tansill-Suddath, First-in-the-Nation Digital Ad Tax Struck Down by Maryland Judge, DCist (Oct. 17, 2022), https://dcist.com/story/22/10/17/md-judge-strikes-down-states-digital-ad-tax/; Complaint, Comcast of Cal. Md. Pa. Va. W. Va. LLC v. Comptroller of the Treasury of Md., C-02-CV-21-000509 (Md. Cir. Ct. Anne Arundel Cty.) (The Dormant Clause is found in the U.S. Const. Art. I, § 8, cl. 3, and the Due Process Clause is found in U.S. Const. amends. X, XIV).

[10] Michal J. Bologna, Verizon, Comcast Proceed in Suit Over Maryland Digital Ad Tax, Bloomberg Law (Mar.15, 2022, 4:56 PM), https://news.bloomberglaw.com/tech-and-telecom-law/verizon-comcast-proceed-in-suit-over-maryland-digital-ad-tax.

[11] Steve Lash, Judge Strikes Down MD.’s Digital Advertising Tax as Unconstitutional, Daily Record (Oct. 17, 2022), https://thedailyrecord.com/2022/10/17/judge-strikes-down-md-s-digital-advertising-tax-as-unconstitutional/.

[12] Id.; Bologna, supra note 10.

[13] Id. Viewpoint neutrality is a First Amendment principle which prevents the state from discriminating based on viewpoint, subject matter, or subject identity. U.S. Const. amend. I.

[14] Id.

[15] Brown, supra note 3.

[16] Lash, supra note 11.

[17] See Uliano, supra note 1.