From Procedural Error to Tax Dispute: The Maryland Digital Advertising Tax Cases

From Procedural Error to Tax Dispute: The Maryland Digital Advertising Tax Cases

July 6, 2023

The United States’ first law taxing revenue earned on digital advertisements shown to residents of a state continues to be battled within the court systems. On May 9th 2023, the Supreme Court of Maryland overturned its lower Circuit Court ruling stating that the court lacked jurisdiction over the case. This decision reinstates Maryland’s Digital Advertising Gross Revenue Tax Act that taxes businesses with global revenues that exceed $100 million.

Tech Giants vs. State Governments: The Battle Over Digital Advertising Tax

The Maryland case is being closely followed by other states seeking to find solutions for declining sales tax revenues as more business continues to be conducted online. Large tech companies such as Facebook, Google, and Amazon have held that they are being unfairly targeted by the tax.

Maryland’s graduated Digital Advertising tax applies 2.5% – 10% rates on digital advertisers that exceed $100 million in global gross revenue. It projected an annual $250 million in tax revenue from its digital advertising tax with the expectation of using it to fund their state education initiative, Blueprint for Education. Entities reportedly paid $101 million to Maryland for digital advertising tax on their 2022 estimated and final tax returns while others have deferred their payments pending legislative outcomes. When under the Anne Arundel County ruling, the state issued millions of dollars in refunds to taxpayers.

With the May 9th Supreme Court of Maryland decision, Maryland must now contend with collecting taxes now due, recovering refunded taxes, and manage the deficit to its education system created by not having the anticipated funds available.

The Maryland Supreme Court order sent the case back to Anne Arundel County Circuit Court with direction to dismiss the case. The dismissal ordered was completed on May 16, 2023.
The Supreme Court sided with Maryland’s comptroller, Brooke E. Lierman, who appealed the lower court’s decision—with the state Attorney General’s Office defending the tax against Verizon and Comcast—contending that the plaintiffs did not exhaust their ability to protest the digital ad tax by administrative means before filing suit in Anne Arundel County.

Did You Know? Supreme Court and other appellate court decisions are based on procedural error(s), rather than on the merits of the case.

A similar case filed in Baltimore on February 18, 2021, in the United States District Court was dismissed December 2, 2022 following Maryland’s Circuit Court ruling. This case challenging Maryland’s digital advertising tax was brought by the U.S. Chamber of Commerce and four trade groups against Maryland’s then-Comptroller Peter Franchot. Two of its primary arguments were the disparity of taxing digital—but not print—advertising and the companies based on global revenues rather than those within Maryland’s jurisdiction.

The U.S. Chamber of Commerce filed an intent to appeal the dismissal with the U.S. District Court on December 13, 2022. With last month’s repeal of the Circuit Court’s decision, additional activity within the Federal Court is likely.

Maryland Digital Advertising Tax Timeline

Tracking development of the digital tax in Maryland has been confusing for many. Here is a breakdown of the timeline so far:

  • March 18, 2020Maryland House Bill 732 passed Digital Advertising Gross Revenue Tax Act
  • May 7, 2020 – Act vetoed by then-Governor Larry Hogan
  • February 12, 2021 – Veto overridden by state lawmakers; Maryland’s Digital Advertising Gross Revenue Tax Act became law
  • Feb 18, 2021 – Case brought in U.S. District Court in Baltimore by U.S. Chamber of Commerce and groups representing online companies and advertisers.
  • April 15, 2021 – Amended complaint filed Sep 10, 2021; Case in Anne Arundle Circuit Court brought by Verizon Media Inc. and Comcast
  • March 4, 2022U.S. District Court dismissed case in part.
  • November 18, 2022 – Final judgement issued in Maryland Circuit court ruling. Circuit Judge Alison L. Asti ruled that the tax on digital advertising violates the federal Internet Tax Freedom Act that prohibits discrimination against electronic commerce, that the law violates the U.S. Constitution prohibiting state interference with interstate commerce and singles out plaintiffs for selective taxation and is not content-neutral. C-02-CV-21-000509
  • December 2, 2022 – U.S. District Court dismissed case in light of Asti’s decision.
  • December 13, 2022 – U.S. Chamber of Commerce filed a Notice of Appeal
  • May 5, 2023 – Maryland’s comptroller, Brooke E. Lierman, appealed the decision before the Supreme Court of Maryland with the state Attorney General’s Office defending the tax
  • May 9, 2023Ruling by the Maryland Supreme Court reversing the Circuit Court decision, dismissed by Circuit Court May 16
  • May 10, 2023 – Maryland Comptroller published Digital Advertising Tax Return Alert

Stay Ahead of the Curve with REDW

The fight against Maryland’s tax on digital advertising will continue to receive national attention. Taxation at the state level on advertising and other ecommerce activities has broad implications across industries and courts. How and where those arguments will be heard will be spread across federal, state, and local jurisdictions as well as within tax court protests.
REDW implores all states, digital advertisers, and others concerned with digital advertising taxation to seek professional guidance on the calculations, remittance, and recovery of taxes.

REDW’s State and Local Tax advisors are accredited, skilled professionals ready to partner with you to navigate the intricacies of Maryland’s digital ad tax and other state and local tax matters. Contact us today.

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