Maryland’s first-in-the-nation tax on digital advertising violates federal law and multiple provisions of the U.S. Constitution, the Maryland Tax Court ruled August 14 in three cases (Apple Inc. v. Comptroller of Maryland; Google LLC v. Comptroller of Maryland; and Peacock TV LLC v. Comptroller of Maryland).
The court reversed the Maryland comptroller’s denial of the companies’ refund claims and ordered the state to return the taxes with interest.
The rulings are relevant to California, where several bills to tax digital advertising have been proposed in recent years. AB 796 (Lowenthal), which sought to tax “programmatic advertising,” was defeated earlier this year.
Maryland enacted the tax in 2021. It imposes rates ranging from 2.5 percent to 10 percent on gross revenue from digital advertising services earned by companies with annual global gross revenue exceeding $100 million. The rate increases based on a company’s total worldwide revenue, rather than solely its activity in Maryland.
The three companies challenged taxes paid for 2022, the first year Maryland collected the tax.
In separate decisions involving the three taxpayers, the court ruled that the tax violates the federal Internet Tax Freedom Act, which prohibits states and local governments from imposing discriminatory taxes on electronic commerce.
The dispute centered in part on whether digital advertising is sufficiently comparable to advertising delivered through non-digital means, and the court concluded that digital and non-digital advertising are “similar services” for purposes of the federal law. In reaching that conclusion, the court rejected the comptroller’s attempt to distinguish taxable digital advertising based on whether advertisements are “programmatic” and “visual.”
The Maryland Tax Court separately held that the tax violates the dormant Commerce Clause because its graduated rates and global revenue thresholds cause a taxpayer’s Maryland tax burden to increase based on business activity occurring outside the state. The structure makes the tax unfairly apportioned and discriminates against interstate commerce, the court ruled. The court also found a related violation of the Due Process Clause.
In Peacock’s case, the court held that Maryland’s exemption of certain broadcast and news media entities violates the First Amendment, but rejected Peacock’s separate claim under the Foreign Commerce Clause.
The rulings follow several years of litigation over the tax. A trial court previously struck down the tax as unconstitutional, but the Maryland Supreme Court set aside that ruling in 2023 after concluding that taxpayers were required to exhaust the state’s administrative remedies before pursuing their challenges in court.
Apple, Google, and Peacock subsequently pursued refund claims through the administrative process. After the comptroller denied the claims, the taxpayers went to the Maryland Tax Court.
The decisions can be appealed to a Maryland circuit court within 30 days.
The companies were represented by McDermott Will & Emery LLP (Google), Eversheds Sutherland LLP (Peacock), and Pillsbury Winthrop Shaw Pittman LLP (Apple).