A Maryland state tax court has invalidated the state's digital advertising tax, ordering officials to refund taxes already paid by major technology companies including Apple, Google, and Peacock TV. The court determined that the tax, enacted in 2021, contravened the federal Internet Tax Freedom Act and multiple provisions of the U.S. Constitution, including the First Amendment, the commerce clause, and the due process clause.
The ruling is being closely watched by other states that have considered implementing similar taxes on online advertising. Maryland had estimated that the tax could generate approximately $250 million annually, intended to fund a significant K-12 education initiative. The law applied a tiered tax rate based on global gross revenues, starting at 2.5% for companies with over $100 million in annual revenue and reaching up to 10% for those exceeding $15 billion.
Supporters of the legislation argued it was necessary to modernize Maryland's tax structure in response to evolving business advertising practices. However, tech companies, including Meta and Amazon, challenged the tax in various legal forums, asserting it unfairly targeted them. Previously, the 4th U.S. Circuit Court of Appeals ruled that a portion of the law violated the Constitution by prohibiting Big Tech firms from disclosing the tax to their customers, which was deemed an infringement on free speech.
Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk, both Democrats, stated they respectfully disagreed with the tax court's decision and anticipate further legal proceedings. They reiterated that the tax was designed to align the state's tax system with economic changes. "We will continue working with the Attorney General and Comptroller as this matter proceeds through the courts," they said.
The tax court's decision also highlighted that the regulation of interstate commerce falls under the purview of Congress, not state legislatures. The court found the tax's reliance on global revenue, rather than in-state advertising income, to be inappropriate. Furthermore, the court reasoned that under the federal Internet Tax Freedom Act, which prohibits e-commerce taxation if similar services are not taxed, the digital advertising tax was barred because digital ads are not significantly different from traditional print or billboard advertisements.