Maryland’s Digital Advertising Tax Defeated

A Maryland circuit courtroom choose has struck down Maryland’s first-in-the-nation digital promoting tax (“Digital Advert Tax”). On Oct. 17, 2021, ruling from the bench, the choose held that the legislation violates the federal Web Tax Freedom Act (ITFA), the Commerce Clause of the U.S. Structure, and the First Modification. This GT Alert supplies some observations on this consequential taxpayer victory.

1.  The Determination is Unsurprising, however Important

In 2020 the Maryland Normal Meeting handed legal guidelines that allowed Maryland to change into the primary state within the nation to impose a tax on revenues that sure companies derive from offering promoting companies on a digital interface, together with banner promoting, search engine promoting, interstitial promoting and different comparable promoting companies (“digital promoting companies”).¹ In 2021, the Maryland Normal Meeting amended the Digital Advert Tax, notably by including a provision that prohibited companies from straight passing on the price of the tax to clients via a separate charge, surcharge, or line merchandise and exempting sure promoting service suppliers.

Certainly, some tax practitioners opined that the Digital Advert Tax, as enacted, can be discovered void and unenforceable, mainly as a result of the tax was a transparent violation of the ITFA.² In 1998, Congress enacted the ITFA to ban state and native governments from, amongst different issues, imposing “a number of or discriminatory taxes on digital commerce.”³ The ITFA particularly defines what constitutes a “discriminatory tax.” “Discriminatory tax” is outlined to incorporate “any tax imposed by a State . . . on digital commerce that . . . is just not usually imposed and legally collectible by such State . . . on transactions involving related property, items, companies, or data completed via different means. . . .”⁴ “Digital commerce” is outlined as “any transaction carried out over the Web or via Web entry, comprising the sale, lease, license, provide, or supply of property, items, companies, or data. . . .”⁵ Given the above, an unlawful discriminatory tax is one imposed on digital commerce that’s not usually imposed on transactions involving related companies completed via different means.

As soon as enacted in 2021, the Digital Advert Tax was challenged on the federal and state stage.⁶ Each circumstances challenged the tax on the premise that it violated the ITFA, the Commerce Clause, and the Due Course of Clause. A federal choose’s dismissal of a considerable problem – that the tax violated the ITFA – meant that a lot rode on the state-level ITFA problem to the Digital Advert Tax.

Though the Anne Arundel Circuit Court docket choose’s Oct. 17 determination could have expedited the future of the Digital Advert Tax, the Comptroller could nicely attraction the choice to the Maryland Court docket of Particular Appeals, Maryland’s second highest courtroom. That is partly as a result of, though the Digital Advert Tax is barely supposed to be imposed on a restricted variety of companies, the authorized affect of this case transcends the taxation of digital promoting. The case has implications for a way far states can search to increase their tax bases to incorporate sure forms of digital commerce whereas contemplating ITFA restraints.

2.  Maryland’s Digital Advert Tax Served as a (Defective) Blueprint for Different States

To date, Maryland’s Digital Advert Tax served as a mannequin for different states to contemplate. That is shocking contemplating the plethora of non-ITFA associated points that additionally plagued the legislation. However in evaluating the circumstances beneath which the tax was born, it appears clear Maryland’s legislation was not the perfect one to function a nationwide mannequin.

2020 was poised to be the 12 months of the Kirwan Fee on Innovation and Excellence in Schooling’s Blueprint for Maryland’s Future, a multi-year initiative devoted to growing and recommending appreciable instructional coverage reforms in Maryland. The reforms span over 10 years and are estimated to value the state an extra $2.6 billion within the fiscal 12 months 2030, in response to the Normal Meeting. So, it was no shock when the legislative session opened with a plethora of tax proposals, looking for to extend state income to fund the Kirwan Fee’s plan, with a tax on digital promoting to function the chief income generator for the multi-year instructional reform plan.

On March 17, 2020, the Normal Meeting introduced it might finish its session on March 18, 2020—resulting from COVID-19—and reconvene in Might. Following the announcement, legislatures hastened to cross legal guidelines, with many centered on funding the Kirwan Fee’s suggestions. These have been the circumstances beneath which the nation’s first tax on digital promoting was handed.

For states trying to enterprise into the taxation of an ecosystem as complicated, huge, and layered as digital promoting, Maryland’s legislation could be used as a roadmap of what to keep away from when embarking on the endeavor of taxing beforehand untaxed digital commerce.

* Greenberg Traurig is just not formally registered to supply authorized companies in Maryland. Particular Maryland legislation questions and Maryland authorized compliance points, nonetheless, may be addressed by attorneys licensed to observe legislation in Maryland.

¹ Md. Code Ann. Tax-Gen § 7.5-101(D).

² See e.g., Maryland State Bar Affiliation Part of Taxation Testimony, Jan. 29, 2020.

³ Pub. L. No. 105-277, Title XI, 112 Stat. 2681 (1998) (enacted as a statutory be aware to 47 U.S.C. § 151); ITFA § 1101(a). Sure provisions of ITFA have been subsequently amended by laws enacted in 2004 and 2007. See Pub. L. No. 108-435, 118 Stat. 2615 (2004); Pub. L. No. 110-108, 121 Stat. 1024 (2007). All references to the ITFA on this Alert consult with the ITFA in its present type, until particularly acknowledged in any other case.

⁴ ITFA § 1105(2)(A)(I).

⁵ ITFA § 1105(3).

⁶ Chamber of Commerce of america of America et al. v. Franchot (Civil No. 21-cv-410 (D. Md., filed Feb. 18, 2021); Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-CV-21-000509 (Md. Cir. Ct Anne Arundel Cty.).