Maryland Digital Advertising Tax Struck Down in State Court

On October 17, 2022, a Maryland circuit court judge struck down Maryland’s tax on digital advertising services as being in violation of the Internet Tax Freedom Act (ITFA), the Commerce Clause of the U.S. Constitution, and the First Amendment.  The tax was the first of its kind enacted in nation, and is also being challenged in federal court on similar grounds.

The state court decision in Comcast v. Comptroller was issued by Judge Alison Asti of the Anne Arundel County Circuit Court.  As reported by Tax Analyst, TaxNotes, Asti issued her ruling from the bench (i.e., without a written decision) in the interest of time and brevity, but a written decision is anticipated in the coming days.  She ruled that the Maryland digital advertising tax violated ITFA because the tax was discriminatory.  ITFA prohibits the imposition of a tax that is discriminatory against electronic commerce.  Maryland’s digital advertising tax is imposed on revenue from advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.  Presumably, the judge reasoned that Maryland’s tax was discriminatory because it was not also imposed on advertising revenue from placing advertisement on forms media (e.g., print newspapers and magazines, television commercials, etc.).

The judge also held that the tax violates the dormant commerce clause, which prevents states from enacting legislation that discriminates against or unduly burdens interstate commerce.  This decision was based on Asti’s opinion that the enacted tax makes little effort to reasonably apportion the tax so it is only imposed on digital advertising revenue derived from in-state activity.  Asti also took issue with the graduated rate tax being based on worldwide gross revenue from sales, and not just revenue from advertising.

The revenue from the new tax was intended to help fund Maryland’s public schools, and took aim at the biggest of technology companies that derive revenue from online advertisements (i.e. those with global annual gross revenues of at least $100 million).  Maryland had estimated the tax on digital advertising could raise about $250 million a year to help increase funding to the state’s public school system.

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