The Maryland Tax Court has declared the state’s digital advertising tax unconstitutional and ordered refunds for the five‑and‑a‑half years of collections made under the tax. The ruling, based on violations of the Internet Tax Freedom Act, the Commerce Clause, and the Due Process Clause, is expected to shape how other states design—or abandon—similar taxes.
Legal basis for striking down the tax
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Internet Tax Freedom Act (ITFA) – Federal law bars taxes that single out e‑commerce while exempting comparable offline services. The court found that digital ads are substantially similar to billboards, newspaper ads, and TV commercials, so the tax’s exclusive focus on digital advertising violated ITFA. Maryland’s arguments that the tax targeted a distinct category of advertising and that ITFA lacked a private enforcement mechanism were rejected.
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Commerce Clause – Maryland’s tax applied graduated rates based on an advertising platform’s worldwide gross revenue, not on revenue generated within the state. This “global‑revenue” formula fails the Complete Auto test, which requires (1) a fair apportionment of tax liability, (2) a relationship between the tax and services received, (3) external consistency, and (4) nondiscrimination. The court held the tax violated at least three of these prongs because it disproportionately taxed out‑of‑state commerce without a rational link to in‑state services.
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Due Process Clause – Due process demands (1) a minimal connection between the taxed activity and the state, and (2) a rational relationship between the tax base and the value derived from the state. While the tax already failed the first requirement under the Commerce Clause analysis, the court emphasized that its discriminatory structure also breaches the second due‑process requirement.
Immediate consequences
- The court ordered refunds for all taxes collected under the digital ad tax for the past five and a half years.
- Refunds are likely to be stayed while Maryland seeks judicial review in the circuit court, a filing that must occur within 30 days.
- If the circuit court upholds the Tax Court’s decision, the state could appeal to the Maryland Court of Appeals and potentially to the Maryland Supreme Court.
Broader implications
- Illinois and Utah, which enacted their own digital advertising taxes in 2024, are watching the Maryland decision closely. Although their statutes differ in detail, the Maryland rulings on ITFA compliance, fair apportionment, and due‑process requirements provide a legal benchmark.
- Lawmakers in other jurisdictions considering digital ad taxes should evaluate whether their proposals avoid:
- Targeting only digital ads while exempting comparable offline media.
- Using out‑of‑state revenue metrics that lack a nexus to the taxing state.
- Creating a tax structure that fails the Complete Auto test or lacks a rational relationship to services rendered.
The Maryland case underscores the difficulty of imposing a digital‑advertising tax that survives constitutional scrutiny, signaling a likely slowdown in similar initiatives nationwide.
Source article: taxfoundation.org
