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Maryland Tax Court Hears First Case on Digital Ad Tax Challenge, While Chamber of Commerce Advances its First Amendment Challenge in Federal Court

Tax Development Apr 24, 2024

Maryland Tax Court Hears First Case on Digital Ad Tax Challenge, While Chamber of Commerce Advances its First Amendment Challenge in Federal Court

Peacock TV, LLC v. Comptroller of Maryland, Case #23-DA-OO-0654 in the Maryland Tax Court, was heard on April 18, 2024, before Judge Wisniewski. Peacock was first in line among large platform operators challenging the law, including Apple, Meta, and Google. Peacock claims the law violates the Internet Tax Freedom Act’s (ITFA’s) anti-discrimination provisions, the Commerce Clause, and the Foreign Commerce Clause.

Judge Wisniewski’s questions on the ITFA issue focused on whether digital ads should be considered the same as nonelectronic ads. Peacock argued they are the same because both convey messages encouraging consumers to purchase a good or service. The state argued that the different business model used to sell digital ads creates a sufficient distinction to overcome the ITFA.

Peacock’s Commerce Clause arguments center on the law’s use of global revenues to determine tax rates instead of using activity that occurs within the state. Peacock also noted that the tax runs contrary to statements by the U.S. Trade Representatives, admonishing other nations against enacting similar taxes. A state tax should not violate principles the United States advocates at an international level because that undermines the nation’s ability to speak to foreign matters with one voice, violating the foreign commerce clause of the U.S. Constitution. The state argues that the tax is fairly apportioned to Maryland activity. Judge Wisniewski has indicated he will issue a joint decision by the end of this year in this matter and similar cases brought by Apple and others.

Another lawsuit challenging the Act was brought by the Chamber of Commerce of the United States, Internet Association, NetChoice, and Computer & Communications Industry Association1 (the “Plaintiffs”). The Plaintiffs claimed the Act violated the ITFA, the Commerce Clause, the Due Process Clause, and the First Amendment. The first three challenges were dismissed as barred by the Tax Injunction Act because state law would have provided an adequate remedy. The First Amendment challenge was reinstated in January by the Fourth Circuit Court of Appeals.2 Plaintiffs (except Internet Association, which declined to participate in the appeal) filed a new brief outlining their arguments on March 29, 2024.

The Chamber asserts that the prohibition on retailers, when passing through the tax to customers, from identifying Maryland lawmakers as the source of rising prices, violates its First Amendment rights. The Act states that a taxpayer “may not directly pass on the cost of the tax imposed under this section to a customer . . . by means of a separate fee, surcharge, or line-item.” The state agrees that the provision does not prohibit price increases due to the tax. Instead, the provision prohibits taxpayers from listing a separate fee, surcharge, or line-item identifying the tax as the source of the price increase. Plaintiffs argue this is a violation of the First Amendment because it impermissibly restricts communication about prices between buyers and sellers.

Current caselaw draws a distinction between laws that regulate what sellers can charge customers and how sellers communicate their prices. The latter is generally viewed as a speech regulation subject to First Amendment protections. Plaintiffs argue that the First Amendment is implicated because the law only prohibits communicating information about the tax by means of a separate fee, surcharge, or line-item. Sellers are free to raise their prices but cannot tell consumers exactly how much prices are rising because of the tax imposed by Maryland lawmakers.

In its brief, the state argues that sellers may still inform their customers that an invoiced charge is higher because of the new tax as long as that communication does not occur by means of a separate fee, surcharge, or line-item. An invoice line-item listing the amount of tax is impermissible. However, language on the invoice listing the amount of tax attributable to the transaction is permissible per the state’s briefs. The state did not explain how to apply this distinction.

The District Court has been tasked with determining if there is any set of circumstances under which the pass-through provision of the Act would be valid. Challenges to other aspects of the Act in separate cases are still being decided.

The experts at Ryan will continue to monitor this developing issue as many other states3 are also considering a digital advertising tax. Please reach out to any of our experts listed below if you have questions regarding this unique way of squeezing revenue out of taxpayers. 

1 Chamber of Commerce of the United States of America, et. al. v. Lierman, No. 1:21-cv-410-LKG in the United States District Court for the District of Maryland.

2 See the Fourth Circuit’s January 10, 2024 Order in No. 22-2275 for more information on the procedural history.

3 Nebraska’s Legislative Bill 388 containing a similar tax failed to advance on April 18, 2024, the final day of the 2024 session. California lawmakers introduced AB 2829, another digital ad tax, on April 1. Connecticut, Indiana, Massachusetts, and New York have also recently made efforts to enact similar taxes, though none have yet been passed.


Brian Stromen

Jonathan Geiger

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