Maryland Tax Court Rejects State’s Digital Advertising Tax

The Maryland Tax Court has invalidated the state’s tax on digital advertising, a first-of-its-kind measure in the United States, and directed the refund of taxes collected from major tech firms. This ruling came after the court deemed the tax inconsistent with the federal Internet Tax Freedom Act and several amendments of the U.S. Constitution, including the First Amendment and clauses on commerce and due process.

The tax, introduced in 2021, aimed to generate approximately $250 million annually to support an extensive K-12 education measure. It targeted large tech companies like Apple, Google, and Peacock TV, levying a 2.5% rate on companies earning over $100 million globally. The tax rate escalated up to 10% for companies with global revenues exceeding $15 billion.

Despite its objectives, the law faced criticism and legal challenges from major companies such as Meta and Amazon. They argued that the tax unfairly focused on them. The law also previously faced a setback in the 4th U.S. Circuit Court of Appeals. This court found a portion of the law unconstitutional because it restricted tech companies from informing customers about the tax, infringing upon their free speech rights.

Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk expressed their disagreement with the tax court’s decision. In a joint statement, both Democrats emphasized the need for Maryland’s tax system to evolve with the economy. They pledged to continue legal proceedings alongside the Attorney General and Comptroller.

The tax court criticized the state’s approach, noting that Congress oversees interstate commerce regulation. The law improperly relied on global revenue instead of in-state advertising revenue. According to the federal Internet Tax Freedom Act, e-commerce services cannot be taxed if similar offline services remain untaxed. Digital advertising currently lacks significant distinction from traditional ads like print or billboards, meaning the tax does not apply under current definitions.