Last year, Maryland became the first state to impose a tax on digital advertising services (the “Digital Tax”). The digital tax was passed by both legislative bodies, but was vetoed by Governor Larry Hogan. In February of 2021, both houses overrode the governor’s veto and the law became effective the following month.
The Digital Tax imposes tax on gross revenue derived from digital advertising services in Maryland at graduated rates, from a minimum of 2.5% to a maximum of 10%. The Digital Tax primarily targets large social media, search engine, and digital communication companies such as Facebook, Google, and Amazon.
COMCAST AND VERIZON ARE ALSO CHALLENGING THE DIGITAL TAX
On April 15, 2021, Comcast and Verizon filed complaints in Maryland state court challenging the Digital Tax on federal Constitutional grounds, and on the grounds that it violates the Supremacy Clause and the Declaration of Rights in the Maryland Constitution.
Note: Other taxpayers have filed lawsuits in federal court stating the Digital Tax violates the United States Constitution. The state lawsuit does not seek the injunctive relief that the federal plaintiffs seek.
More recently, on or about March 14, 2022, the state court judge denied the state’s motion to dismiss the case. Therefore, Comcast and Verizon’s state court challenge will move forward. The state court judge found no basis for granting the state’s motion to dismiss the challenge to the Digital Tax.
The state court judge also agreed Comcast and Verizon are not required to exhaust administrative remedies to have the case heard in state court. Furthermore, the judge ruled that Comcast and Verizon could proceed with constitution and tax freedom arguments.
Taxpayers and states are closely watching these cases because if Maryland prevails in litigation, other states will follow suit and enact legislation that copies the Digital Tax.
For questions regarding the Digital Tax, contact trusted advisors of the REDW state and local tax (SALT) team.