Brief Overview
Maryland's digital advertising tax is the first in the nation and is undergoing intense scrutiny by the Maryland Tax Court. More than a dozen lawsuits have been filed in the past several years challenging the tax. This Client Alert updates the status, and the long road ahead for clarity regarding the validity of the taxing regime.
In 2021, Maryland was the first and only state to enact a digital advertising tax. (Md. Tax-General Code Ann. § 7.5-102). The tax is imposed upon corporations with at least $100 million of global annual gross revenues. The amount of digital sales tax liability is calculated based upon the apportionment of gross sales in the state of Maryland to total global sales. Since enacted, at least thirteen other states have proposed similar digital taxes, including California, Rhode Island, Nebraska, Louisiana and Virginia. The states are watching the litigation closely in Maryland, and waiting for more clarity in the law. While the majority of those liable for the tax in Maryland have paid the tax, they also immediately filed lawsuits challenging it as unconstitutional or alternately, in violation of the Internet Tax Freedom Act ("ITFA") enacted in 2004. The ITFA primarily bars state and local governments from imposing higher taxes on e-commerce. However, taxes comparable to those imposed generally on commerce are not prohibited. Because the tax is graduated based upon global sales, the challengers also argue that the tax violates the Commerce Clause in the U.S. Constitution.
In 2021, shortly after the legislation was enacted, the U.S. Chamber of Commerce filed suit against Brooke Lierman, the Comptroller of Maryland: Chamber of Commerce of the United States v. Brooke Lierman, Civil Action No. 21-cv-00410 (D.C. MD 2024). The Court recently dismissed the case in favor of the Comptroller on jurisdictional and constitutional grounds, after a remand from the Fourth Circuit Court of Appeals. That series of cases including the appeal and remand, did not include a serious discussion of the substance of the Maryland statute, nor did it clarify whether the law is constitutional and/or in violation of the ITFA. Because state law provides an adequate remedy, the federal courts declined to rule.
Pending challenges to the digital ad tax have been filed in the Maryland Tax Court by more than a dozen companies. The initial case, Peacock TV, LLC v. Comptroller of Maryland, #23-DA-OO-0654, was essentially consolidated with cases filed by Google, Apple and META. Status hearings were held on November 12, 2024, and November 20, 2024, with 15 to 30 minutes allocated to each of the four plaintiffs for individual consecutive remote hearings. Up to a dozen other corporations' cases are stayed pending the decision of the Court in the Peacock et al. cases. While the Tax Court initially promised a decision by December 2024, the latest is the Court's Scheduling Order dated November 21, 2024, providing an additional six months for discovery, including an additional allowance of four expert and fact witnesses for each party. Discovery must conclude by June 30, 2025, with a series of hearings starting July 21, 2025. The primary argument made by taxpayers is that the sales tax on digital advertising is discriminatory and taxes revenue from digital ads at higher rates than the taxes on general commerce. The opposing arguments include that comparing digital ad revenue to general commerce advertising is comparing apples and oranges. Digital ads target individual users and measure interactions, while a newspaper ad or billboard is static. The ultimate argument by the state is that the ITFA is outdated and limited, and should not apply to digital advertising. Constitutional arguments against the tax allege violations of the Commerce Clause. Taxpayers focus on the graduated rate of the tax, between 2.5% and 10%, based upon an apportionment formula that takes into account global sales, rather than a flat tax rate based solely on digital ad sales in Maryland. The issue is whether that type of graduated tax is allowed under the Commerce Clause, because the tax rate is based on out-of-state activities rather than focused on activities within Maryland.
It appears these consolidated lawsuits are far from a decision, which will then almost certainly be appealed. Appeal lies with the Maryland Circuit Court for a county in which the taxpayer conducts business. That appeal is an administrative appeal, without any additional proceedings. The Circuit Court's decision may be appealed to the Appellate Court of Maryland (formerly the Maryland Court of Special Appeals). That decision may be appealed to the Maryland Supreme Court (formerly the Maryland Court of Appeals). However, the appeal to the MD Supreme Court is discretionary and will only be heard if the court grants certiorari. If the court's decision involves a federal question, including whether the law violates the U.S. Constitution, the case can be appealed to the U.S. Supreme Court by filing a writ of certiorari. The appeal to the U.S. Supreme Court is also discretionary, and the Court is not obligated to accept the case. If the decision of the Maryland Supreme Court only involves Maryland state law, the decision is final, with no further appeal rights. Similarly, if the Maryland Supreme Court denies certiorari and there is no federal question, the decision of the Appellate Court of Maryland will be the final decision. It appears the parties are aware of these jurisdictional requirements and thoughtfully pursuing and preserving the federal constitutional issues.
As can be predicted, all of these appeals will undoubtedly take many years. Before the litigation results in a final decision regarding the merits of the digital sales tax, it is possible a more universally accepted version of the digital tax may be adopted by the varying states to revise or bolster digital taxes that are currently proposed or enacted. A universal state tax regime could be easier for courts to accept, since a national corporation with activities in all 50 states would find it administratively difficult to comply with 50 different digital taxes, although AI could help. Two quasi-governmental bodies: The Multistate Tax Commission (https://www.mtc.gov/testing-page-sales-tax-on-digital-products) and the Streamlined Sales Tax Governing Board (https://www.streamlinedsalestax.org) have worked in the past to study the issue with a goal of providing uniform digital tax policies, including digital sales taxes. Unfortunately, this work seems to have stalled. Therefore, all eyes are on the Maryland Tax Court to determine whether the digital ad tax is constitutional and in compliance with the ITFA.
The Maryland Comptroller, Brooke Lierman, provided the following statement on February 3, 2025, when asked for a comment on the current status of the digital tax. Comptroller Lierman stated:
"My Office remains committed to the equitable and fair administration of the entirety of Maryland's tax code, including the digital advertising gross revenue tax, to provide the resources necessary to support our communities and provide Marylanders with the resources to build a prosperous future."
Although the revenue from the digital tax has not been made public, it has been reported that Maryland collected approximately $93 million in 2022 and $82.5 million in 2023. All of the revenue is earmarked for the state's education system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
