The first digital advertising tax in the country was introduced in Maryland last year and became effective for taxable periods beginning January 1, 2022, over the governor’s veto. Even before its delayed effective date, the U.S. Chamber of Commerce and several trade groups filed a complaint in federal District Court for the District of Maryland.1 The lawsuit challenged several constitutional and federal statutory issues under the Commerce and Due Process Clauses and the Internet Tax Freedom Act.
On March 4, 2022, the District Court dismissed a significant portion of the case, citing lack of jurisdiction in federal court. In dismissing several issues, Judge Lydia Kay Griggsby referred to the federal Tax Injunction Act (TIA), which bars U.S. district courts from hearing state tax disputes before the issues are challenged in state courts. The four trade associations bringing the suit had alleged that the Digital Tax Ad Act (“the Act”) charge was a levy, not a tax, to justify their approach. The court agreed with the state that the charge imposed is a tax because it is imposed by the Legislature, applies to a broad segment of the public, and is intended to raise revenue for general government activity that will benefit the entire community.
The court did agree, however, to hear the First Amendment and Commerce Clause challenges to the Act’s anti-passthrough provision. The Act includes a provision that prohibits the taxpayer from directly passing on the cost of the tax to a customer who purchases the digital advertising services by means of a “separate fee, surcharge or line-item.” This issue is appropriately considered in federal court because it does not involve a challenge to an assessment, levy, or collection of tax under which the TIA would apply. The judge has required both parties to next file a joint report on this issue by April 4, 2022.
We will keep you updated as this challenge progresses.
1 Chamber of Commerce of the United States of America, et al. v. Franchot, Case No. 21-cv-410-LKG, March 4, 2022.
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