Maryland Tax Court Strikes Down Digital Advertising Tax

On August 14, 2026, the Maryland Tax Court (“Court”) struck down the nation’s first state digital advertising tax, concluding that it violated the Internet Tax Freedom Act’s (ITFA) prohibition on discriminatory taxes of electronic commerce, as well as violating the Commerce Clause and Due Process Clause of the U.S. Constitution.¹ The Court ordered the Maryland Comptroller (“Comptroller”) to issue refunds to the taxpayers. The Court issued three separate decisions for each taxpayer: Peacock TV, Google, and Apple.

Tax Details

Maryland’s Digital Advertising Tax (“DAT”) is imposed on taxpayers’ annual gross revenues derived from digital advertising services in Maryland. The rate of the tax ranges from 2.5 to 10% and only applies to taxpayers with at least $100 million in gross annual revenues. The maximum rate applies when a taxpayer’s global revenues reach $15 billion. The tax only applies to taxpayers with annual gross revenues derived from digital advertising revenues in Maryland of at least $1 million. However, Maryland does not impose a tax on non-digital advertising (e.g., billboards, magazines, newspapers, direct mail, broadcast radio, and broadcast television).

ITFA

The federal ITFA prohibits a state or one of its political subdivisions from imposing a tax on electronic commerce that is not generally imposed on transactions involving similar property, goods, services, or information accomplished through other means. Such taxes are deemed discriminatory.

The Court’s inquiry largely focused on whether digital advertising services are similar to non-digital advertising services.

DAT Violates ITFA

In adopting ITFA, the Court stated that Congress clearly did not want internet services of any kind taxed unless similar services were also taxed. Applying a “common-sense” approach, the Court concluded that the provision of digital advertising services is indistinguishable from the provision of non-digital advertising services. The Court noted that, in fact, “they are even more aligned than similar.” Advertising services are rendered in an attempt to induce the public to do something—the medium in which this is transmitted to the consumer does not overcome the inherent similarity. The purpose of both types of advertising is the same and “[o]ther considerations pale.” The Court rejected attempts by the Comptroller to characterize digital advertising as a new business model or industry. Thus, the DAT was found to violate the ITFA. The Court addressed Technical Bulletin 59, which was issued by the Comptroller shortly before the hearing. In this bulletin, the terms “programmatic” and “visual” were introduced as key components of what is considered digital advertising. However, this does not change the fact that the DAT would still violate the “similar” provision in ITFA.

The Court also found that the DAT violates the Supremacy Clause of the Constitution. ITFA is a clear “expression of what Congress wanted: no state discrimination against internet services.” The Court rejected the Comptroller’s argument that by enacting ITFA, Congress exceeded its enumerated powers by ordering states to do something over which it did not have sole authority, in violation of the Anti-Commandeering Clause of the 10^th Amendment. However, in enacting ITFA, Congress was exercising its plenary authority to regulate interstate commerce.

Commerce Clause

The Court also found that the DAT violated the Commerce Clause’s requirements that a tax be fairly apportioned and not discriminate against interstate commerce. Fair apportionment mandates that a tax be both internally and externally consistent. External consistency looks at whether a state taxes only the portion of interstate revenues that reasonably reflects the in-state activity. The DAT fails in this regard. The graduated tax rates are increased based on the taxpayer’s global revenue. Global revenue has nothing to do with a taxpayer’s Maryland activity. Thus, the DAT rate schedule does not reasonably reflect the in-state component of the taxed activity. As a result, companies with greater out-of-state activity may face more tax.

The Court also found that, as a matter of law, the DAT discriminates in an unconstitutional manner. Unfair apportionment is a form of discrimination. In reaching this conclusion, the Court reiterated the unfair apportionment of the graduated tax rates, which in practice and intended effect applies to non-Maryland companies.

Other Constitutional Arguments

The Due Process Clause requires a tax to bear “a rational relationship between the income attributed to the State and the intrastate values of the enterprise.” The DAT failed this test and violated due process because it is discriminatory (the Court restating its Commerce Clause conclusions). However, the DAT was found to not violate the Foreign Commerce Clause. As explained by the Court, “[e]fforts to tax digital advertisement services are bound to proceed internationally and what happens in Maryland would not, in the Court’s opinion, disrupt the federal government’s efforts to keep other countries from doing the same.”

Note: This summary is based on the decision for Peacock TV. In a footnote, the Court stated that there was a total of three opinions, the others involving Google and Apple. According to the Court, “While some arguments and facts differ among these three decisions, the Court’s legal conclusions and ultimate outcomes are similar.”

Ryan’s Insights and Action Steps

This long-awaited decision should encourage companies subject to DAT to consider their own refund opportunities.

Assuming Maryland appeals, this will not be the final chapter to this oft-litigated tax. The Court mandated that the Comptroller issue refunds with interest. Focusing on the service’s purpose, with other considerations largely set aside, the ITFA violation seemed rather obvious.

Questions remain: Pending appeal, will the state continue to try to collect the tax? Will this decision impact the pending appeals in other states that have taxed digital advertising? Will states look at the ITFA analysis, notably the similarity argument, and decide simply to tax all advertising?

Regarding challenges to taxes on digital advertising in other jurisdictions, obviously Maryland court decisions are not binding on other states. However, state courts routinely look at other states for guidance, especially where there is little case law on a particular matter, like in this instance.

We can expect plaintiffs to emphasize the similarity argument when claiming an ITFA violation. They will undoubtedly focus on the identical purpose of advertising services, whereas states may argue that digital advertising is somehow different and justifies different tax treatment.

The Court’s fair apportionment and external consistency analysis under the Commerce Clause was perhaps not surprising. The Maryland tax rates increase based on global revenue and are not tied to in-state business activity. The external consistency argument was also very telling: a tax that is based on revenues not connected with in-state activity is not a tax that is fairly apportioned, as well as being discriminatory.

In the end, given all the challenges, Maryland may drop this tax in favor of a replacement revenue source. Or it may decide to tax all advertising services as part of its sales tax regime. Polling has shown that the public is in favor of taxing Big Tech—so even though this decision may cause states to rethink their approach, states are still likely to target the industry.

The discussion related to the Foreign Commerce Clause was disappointing in that the Court gave short shrift to the petitioner point that the federal government has “opposed efforts by other countries to impose digital service taxes,” yet it has failed to speak out on the state and local taxes being imposed on these same services. While the Court did not find that “the tax prevents the federal government from speaking with one voice,” it seems disingenuous for the current administration to vehemently oppose these taxes when imposed by foreign governments while staying silent when similar taxes are imposed by our state and local governments.

If your company is potentially impacted by this decision, particularly if it pays tax on digital advertising, please reach out to our specialists.

Endnote:
¹ Peacock TV, LLC v. Comptroller of Maryland, Md. Tax Ct., Dkt. No. 23-DA-OO-0654 (August 14, 2026).

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