Maryland digital ad tax struck down
Last fall, ATR pointed out how the tax hike-laden budget that Maryland Gov. Wes Moore (D) signed into law earlier in the year was on shaky ground. That’s because the state budget assumes revenue from a state digital advertising tax, the nation’s first, which stood a good chance of being struck down in court. That’s precisely what ended up happening last week, when the Maryland Tax Court issued a decision overturning that tax.
The court agreed with the plaintiffs that the tax violated the Internet Tax Freedom Act (ITFA), the Commerce Clause, and the Due Process Clause. In its ruling, which the state will likely appeal at taxpayer expense, the court also ordered Maryland to issue refunds for the five years’ worth of digital advertising tax payments that companies have made.
“Aside from being good news for the businesses who will receive refunds and no longer have to pay the digital advertising tax, the Maryland Tax Court’s ruling will serve as a cautionary tale in the other state legislatures where digital advertising taxes have been introduced,” said Grover Norquist, president of Americans for Tax Reform. “In particular, it bodes well for the legal challenges to the digital advertising taxes enacted in Illinois and Utah earlier this year. Do state lawmakers, even far left progressives in the bluest states, really want to spend time and political capital passing a tax that is unlikely to generate revenue for the state and will only end with taxpayers footing the bill for legal costs?”
Former Gov. Larry Hogan (R-Md.) vetoed the digital advertising tax bill when it was sent to his desk in 2020. The Democrat-controlled Maryland House and Senate would go on to override that veto the next year.
“When Maryland lawmakers celebrated overriding Gov. Larry Hogan’s veto in February 2021 to enact the nation’s first digital advertising tax, they envisioned a groundbreaking revenue stream that would generate up to $250 million annually for education reforms,” noted Samuel Handwerger, an accounting lecturer at the University of Maryland’s Robert H. Smith School of Business. “Four years later, that pioneering spirit has turned into a cautionary tale of unintended consequences, endless litigation and a tax that may ultimately cost the state far more than it ever collected.”
The prospect of a long and costly lawsuit didn’t deter Utah and Illinois legislators from becoming the second and third states to enact a digital advertising tax, but the recent Maryland ruling may help convince lawmakers in other states to not follow suit.