Readers of this blog may recall that in February 2021, Maryland became the first U.S. state to enact a tax on digital advertising services, which was summarized here, noting that it was sure to face heavy opposition on several 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.

Sure enough, in October 2022, a Maryland state judge 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, and (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).  This decision was discussed in a prior post here.

The Comptroller of Maryland appealed this Circuit Court decision, and on May 9, the Supreme Court of Maryland concluded that “the Circuit Court for Anne Arundel County lacked jurisdiction over this action because the appellees failed to exhaust their administrative remedies,” noting that its rationale would be explained in a later opinion to be filed by the Court.  The Maryland Supreme Court vacated the Circuit Court decision and remanded the case to the Circuit Court with directions to dismiss the action.

This latest twist in the Maryland Digital Advertising Services Tax saga is clearly not the last, and it further extends the limbo and uncertainty which digital advertising service providers that may be subject to the tax or, at a minimum, the applicable reporting requirements have confronted since the adoption of the tax in February 2021.  It has been reported that as of April 30, Maryland had collected $107 million in digital advertising taxes from 74 taxpayers and had issued refunds of $14.5 million since the tax became effective in 2022.  Maryland’s Department of Legislative Services, however, had initially estimated that tax revenue in 2022 would be $250 million.  It would seem, therefore, that many potential taxpayers have opted not to pay the tax, presumably taking the position that the tax would not survive judicial scrutiny.  The most recent decision of the Maryland Supreme Court, however, casts at least some doubt on that position and may cause more taxpayers to come forward and pay the tax, while preserving their right to pursue a refund in the event the tax is ultimately struck down.  Alternatively, taxpayers who have opted not to pay the tax may continue to refrain from paying the tax and contest an assessment by the Maryland Comptroller’s Office, if and when it arrives in the mail.  Taxpayers who pursue the latter path, however, may be leaving themselves exposed to the imposition of both monetary and criminal penalties for failing to file required tax returns and paying the required taxes, including the timely payment of estimated taxes.

Stay tuned.