Maryland’s tax on digital advertising by tech giants struck down in court

Maryland’s first-in-the-nation tax on advertising by Big Tech companies was struck down by the state’s tax court Friday.

The tax, first approved in 2020, is designed to raise hundreds of millions of dollars for public schools by taxing Big Tech for ads that follow Marylanders around as they peruse social media platforms, websites and streaming services.

But the Maryland Tax Court ruled in favor of three tech companies — Google, Apple and Peacock TV — and ordered the state to refund the taxes they’d already paid.

Representatives for the tech industry cheered the ruling as a win against a tax they believed was illegal from the start.

“Today’s ruling validates what every person with the most basic understanding of tax law has been saying for over six years — digital advertising taxes are illegal on multiple levels,” Doug Mayer, president of Americans for Digital Opportunity, said in a statement.

It’s unclear whether the state can or will appeal the ruling of the tax court, a quasi-judicial state agency that considers tax disputes. The amount to be refunded was not immediately clear.

Comptroller Brooke Lierman, a Democrat who collects the digital ad tax and was named in the case, said in a statement that she’d work with the attorney general to defend the “important law.”

The law, she said, “aligns Maryland’s tax code with the reality of today’s economy, ensures that the country’s biggest tech companies pay their fair share and provides essential support to Maryland’s public school systems.” Lierman voted for the tax when she was a member of the House of Delegates.

The state has collected about $535 million in digital ad taxes since they went into effect in January 2022, much less than the initial estimate of $250 million a year. The money was earmarked to pay for the state’s ambitious public school improvement program known as the Blueprint for Maryland’s Future.

Only the largest tech companies pay the tax — those with $100 million in global revenue who take in at least $1 million from ads shown to Marylanders. The amount of tax ranges from 2.5% to 10% based on the company’s revenue.

The Maryland Tax Court found that the digital advertising tax violates the Internet Tax Freedom Act, a federal law that governs when state and local governments can tax online activity. Under that 1998 legislation, governments can’t tax internet commerce differently from similar goods or services that are not online.

The tax court did not find a distinct difference between online advertising and other forms of advertising, and therefore concluded that imposing different tax rules for the two would be illegal under federal law.

The digital ad tax has been subject to litigation from the start.

A challenge in state courts led to a Supreme Court of Maryland ruling that tech companies hadn’t exhausted their administrative appeals, sending them to the Maryland Tax Court.

Separately, a challenge in federal court resulted in nixing part of the law that banned tech companies from revealing the amount of the tax to consumers by placing a fee or line item on their bills.

House of Delegates Speaker Joseline Peña-Melnyk and Senate President Bill Ferguson, both Democrats, issued a joint statement saying they “respectfully disagree” with the tax court ruling.

“The General Assembly enacted the Digital Advertising Gross Revenues Tax because Maryland’s tax system should keep pace with a changing economy,” the statement says. “As more commerce and advertising moved online, it was appropriate to modernize our tax code so that large digital advertising companies contributed alongside other businesses operating in our state.”