Maryland’s Supreme Court has given the green light to the implementation of the country’s first-ever digital ad tax, despite facing significant opposition. The law, passed during the 2021 General Assembly, aims to target big tech companies by imposing a tax on the revenue generated from selling digital advertising in Maryland. The tax rates vary depending on the annual global gross revenue of the businesses: 2.5 percent for companies making over $100 million, 5 percent for those making $1 billion or more, 7.5 percent for companies making $5 billion or more, and 10 percent for those making $15 billion or more.
Lawmakers supporting the tax argue that it will generate $250 million in revenue, which will be directed towards K-12 education reform. The funds will be used to expand early childhood education, increase teacher salaries, and enhance career readiness programs. Despite initial opposition, the law was eventually enacted after the State Legislature overrode then-Governor Larry Hogan’s veto.
However, opponents of the legislation have filed lawsuits claiming that it violates the 1998 “Internet Freedom Tax Act.” The Chamber of Commerce challenged the law in federal district court, and Verizon and Comcast also took legal action at the state level. In October 2022, a judge from the Anne Arundel County Circuit Court blocked the law, ruling that it violated the U.S. Constitution’s prohibition on state interference with interstate commerce.
The legal battles surrounding the digital ad tax led to an appeals process that culminated in the recent decision by the Maryland Supreme Court. The court concluded that the Anne Arundel County Circuit Court lacked jurisdiction over the case because the plaintiffs failed to exhaust their administrative remedies. In response, the Maryland Chamber of Commerce expressed its dissatisfaction, stating that the ruling did not address the substantive arguments or the constitutionality of the law. The Chamber believes that the tax puts Maryland businesses at a competitive disadvantage, making online advertising more expensive in the state compared to other states, potentially leading to a loss of business investment and growth.
Maryland Attorney General Anthony Brown, who supported the law, welcomed the court’s order. He emphasized that the digital ad tax would support the state’s goal of transforming schools and providing quality educational opportunities for underserved communities. The tax is seen as a critical funding source for Maryland’s sweeping education reform law, known as the Blueprint for Maryland’s Future.
The legal arguments presented by both sides focused on procedural matters and constitutional issues. Julia Bernhardt, an assistant attorney general, contended that the plaintiffs were trying to bypass the established administrative procedures for tax-related constitutional claims. On the other hand, Jeffrey Friedman, an attorney for the plaintiffs, argued that a constitutional exception applied in this case due to the law’s violation of federal law.
The digital ad tax in Maryland has faced resistance from major tech companies such as Facebook, Google, and Amazon. Their attorneys argue that the law unfairly targets them and imposes a tax based on global annual gross revenues, which they claim is an unjust burden.
The implementation of Maryland’s digital ad tax marks a significant milestone in the evolving landscape of taxation for digital services. It sets a precedent for other states considering similar measures and raises important questions about the balance between taxation, interstate commerce, and the funding of public services. As legal challenges continue, the fate of the digital ad tax in Maryland will shape the future of online advertising regulation and taxation across the country.