MD Supreme Court Reverses Lower Court, Upholds State’s Digital Ad Tax

The Maryland Supreme Court overturned a lower court ruling that struck down the state’s first-in-the-nation tax on digital advertising, saying the court lacked jurisdiction over the case.

As previously reported on Conduit Street, in October, Anne Arundel County Circuit Court Judge Alison Ali struck down the novel tax, ruling that the law violated the Commerce Clause of the US Constitution, the federal Internet Tax Freedom Act (ITFA), and the First Amendment.

While the Maryland Supreme Court’s order is silent on the constitutionality of the law, the state high court ruled that Comcast and Verizon challenged the law in court prematurely without first going through the administrative process, sending the case back to Anne Arundel County Circuit Court with directions to dismiss.

Enacted by the General Assembly in February 2021 following an override of a veto by former Governor Larry Hogan, the digital advertising services tax applies to annual gross revenues derived from digital advertising services in Maryland by businesses with at least $100 million in global annual gross revenues. The tax rate ranges from 2.5 to 10 percent, depending on the global annual gross revenues of the business.

Digital advertising services are “advertisement services on a digital interface, including in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” However, advertising services on digital interfaces owned or operated by a broadcast entity or news media entity are not subject to tax. In addition, affected businesses cannot directly pass on the cost of the digital advertising tax to a purchaser of digital advertising services.

Lawmakers estimate the law would raise $250 million annually from massive corporations and advertisers like Google and Facebook to help fund the Blueprint for Maryland’s Future, a multi-year, multi-billion dollar investment in Maryland schools.

In a statement, Maryland Attorney General Anthony Brown praised the Maryland Supreme Court’s order:

I applaud the Supreme Court for acting quickly because the revenues generated by this tax will help us provide our children the best education possible for success. The digital ad tax will support our collective goal of transforming schools across the State. It will help level the playing field so that underserved communities will have access to quality educational opportunities enjoyed by our highest performing schools.

A federal lawsuit brought by the US Chamber of Commerce and others is pending before the United States Court of Appeals for the Fourth Circuit.

Stay tuned to Conduit Street for more information.