Court ruling
The Maryland Tax Court has struck down the state's Digital Advertising Gross Revenues Tax, holding that it violates federal law and the U.S. Constitution. The court ordered a refund of 2022 taxes paid by the taxpayer in the case, granting summary judgment for the taxpayer and reversing the Comptroller's denial of the refund claim.
In its ruling, the court concluded that the tax unlawfully discriminates against digital advertising services compared with similar non-digital advertising services, in violation of the federal Internet Tax Freedom Act. The court also found the tax fails the fair apportionment requirement of the Commerce Clause because its graduated tax rates are based on global revenues rather than activity attributable to Maryland, according to one of the rulings. A second ruling in the case additionally cited the Dormant Commerce Clause and the Due Process Clause as constitutional grounds for invalidating the tax.
The taxpayer is identified in one of the rulings as Google LLC, and in another as a name that begins with "Apple," suggesting the cases may involve separate challenges by the two tech giants. The rulings were issued in the cases of Google LLC v. ... and Apple ...
Fiscal impact
The state collected approximately $536 million from the tax and held it in reserve. The Tax Court ordered that money returned with interest, though an appeal has been signaled. This potential refund obligation to large technology companies is a heavy burden for Maryland taxpayers, according to a staff commentary in The Baltimore Sun, which noted that taxpayers are already facing rising property taxes and payment plans for vehicle registration fees, while budget projections anticipate billions of dollars in deficits over the next few years.
Background of the tax
The digital ad tax was passed in 2021 as a core funding vehicle for the Blueprint for Maryland's Future, a major education funding plan. The legislation was vetoed by then-Governor Larry Hogan, but the veto was overridden by the General Assembly.
Senate President Bill Ferguson was the primary driver of the legislation, according to The Baltimore Sun's commentary, and had described the tax as a matter of "fairness" in a CNN interview. The commentary criticized lawmakers for pushing ahead despite warnings, calling the decision "reckless."
Reaction from state leaders
Following the court's ruling, Senate President Ferguson and House Speaker Joseline Peña-Melnyk issued a joint statement saying, "We respectfully disagree." The statement was reported by The Baltimore Sun, but no further details of their response were provided in the available material.