You may recall that in February 2021, Maryland became the first U.S. state to enact a tax on digital advertising services, including “banner advertising, search engine advertising, interstitial advertising and other comparable advertising services.” Entities with global (not just Maryland or US) annual gross revenues (from all sources, not just advertising revenues) of less than $100 million were exempted (although digital advertising revenues exceeding $1 million would trigger a tax return filing requirement). The applicable tax rate is 2.5% for businesses with global annual gross revenues of $100 million - $1 billion, 5% for businesses with global annual gross revenues of $1 billion - $5 billion, 7.5% for businesses with global annual gross revenues of $5 billion - $15 billion and 10% for businesses with global annual gross revenues in excess of $15 billion.
Even before its passage, the Maryland tax encountered heavy opposition on a number of fronts, including arguments that it (i) violated the Internet Tax Freedom Act (“ITFA”), a federal law which prohibits discriminatory taxes on electronic commerce, (ii) failed a dormant Commerce Clause analysis under the U.S. Constitution by setting rates based on the worldwide gross revenues of advertising platforms -- economic activity that has nothing to do with Maryland -- and targets specific companies (including Amazon, Facebook and Google), and (ii) would disproportionately harm Maryland businesses. The tax was challenged in both federal and Maryland state court, and while a decision in the federal proceedings is still pending, a Maryland state judge, in what may be an unsurprising decision ordered on October 20, 2022, has struck down the tax, concluding that it (i) discriminates against electronic commerce in violation of ITFA because it applies to digital advertising, but not traditional advertising, (ii) violates the Commerce Clause of the U.S. Constitution, which prevents states from enacting legislation that discriminates against or unduly burdens interstate commerce, (iii) violates the First and Fourteenth Amendments of the U.S. Constitution because it “singles out the Plaintiffs for selective taxation and is not content-neutral.” Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC, et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-CV-21-000509 (Md. Cir. Ct. Anne Arundel County). Published reports indicate that Maryland’s attorney general and its Senate President support an appeal of the Maryland judge’s decision, although Maryland’s comptroller reportedly has recommended that the state’s digital advertising services tax be abandoned.
In light of the state court judge’s decision striking down Maryland’s digital advertising services tax, the future of this tax seems uncertain at best, and other states which have considered the adoption of similar tax legislation should take heed. Such taxes will encounter significant legal obstacles and resistance.
The tax "singles out the Plaintiffs for selective taxation and is not content-neutral"