A state tax court in Maryland invalidated the nation’s first state tax on digital advertising and directed state officials to refund tax payments already collected from major tech companies.
The legal dispute had been closely watched by other states that are considering taxing online advertisements.
The Annapolis-based Maryland Tax Court ruled on Aug. 14 that the digital advertising gross revenues tax was unconstitutional after it was challenged in three separate lawsuits by Google, Apple, and Peacock TV. Refunds are expected to run into the hundreds of millions of dollars.
The state imposes the levies based on the businesses’ global revenue. Lawmakers previously said the tax could raise $250 million per year. The money raised from the tax was earmarked for a state education program.
The 2021 tax statute specifically targets the revenue large companies earn from digital advertisements shown in Maryland. Companies that take in more than $100 million in annual global gross revenue were taxed at 2.5 percent.
A sliding scale applies to companies with larger revenues, maxing out at 10 percent for those earning more than $15 billion in global gross annual revenues.
The law’s backers argued that Maryland needed to overhaul its tax system to deal with major changes in how businesses advertise. Lawyers representing the affected companies said their clients were targeted unfairly.
The state court said the tax runs afoul of the federal Internet Tax Freedom Act, the First Amendment, and the due process and commerce clauses of the U.S. Constitution.
The court held that regulating interstate commerce was the business of Congress – not the Maryland General Assembly – and that it was inappropriate that the tax law was premised on global revenue rather than revenue that comes from in-state advertising.
The Internet Tax Freedom Act forbids taxation of electronic commerce if similar services are not taxed. The court held that there is no meaningful distinction between digital advertising and print or billboard ads, meaning the federal bar applies.
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