Court Strikes Down Digital Ad Tax on Big Tech
A Maryland state tax court has invalidated the state’s pioneering tax on digital advertising and mandated state officials to reimburse the tax revenue already collected from major technology companies. The Maryland Tax Court determined that the tax contravenes the federal Internet Tax Freedom Act, in addition to infringing upon the First Amendment and the commerce and due process clauses of the US Constitution. The legal battle has garnered attention from other states contemplating the imposition of taxes on online advertisements. Maryland projected that the tax, sanctioned in 2021, has the potential to generate approximately $250 million annually to support a comprehensive K-12 education initiative. In a ruling issued on Friday, the tax court mandated that the state reimburse the tax funds previously collected from Apple, Google, and Peacock TV.
The legislation imposed a tax on the revenue generated by large corporations from digital advertisements displayed in Maryland. Companies generating over $100 million in global annual gross revenues faced a tax rate of 2.5 percent. The rate increased for companies with larger revenues, reaching a peak of 10 percent for those generating USD 15 billion or more in global gross annual revenues. Proponents of the legislation argued that Maryland required a comprehensive reform of its tax strategies to adapt to the substantial transformations in business advertising practices. However, legal representatives for major technology firms such as Meta and Amazon contested the legislation across various judicial platforms, contending, among other points, that they were being disproportionately singled out.
Last year, the 4th US Circuit Court of Appeals determined that a portion of the law was unconstitutional as it prohibited Big Tech companies from informing customers about the tax. Judge Julius Richardson stated that this action infringed upon the right to free speech. Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk, both members of the Democratic Party, articulated their position by stating that they “respectfully disagree” with the ruling from the tax court and anticipate the continuation of the legal proceedings. They stated that the tax was implemented to ensure that the state’s tax system remains aligned with the evolving economy. “We remain committed to ensuring that Maryland’s tax system is fair, sustainable, and reflects today’s economy,” they said.
“We will continue working with the Attorney General and Comptroller as this matter proceeds through the courts.” The tax court said Congress — not the state legislature — is tasked with regulating interstate commerce, and that the tax law was inappropriately based on global revenue rather than revenue from in-state advertising. The federal Internet Tax Freedom Act prohibits the taxation of e-commerce unless analogous services are subjected to taxation. For the time being, the tax court determined that there is not a significant distinction between digital advertising and traditional print or billboard advertisements, indicating that the prohibition on taxation remains in effect.
