Maryland Supreme Court Revives State's Digital Ad Tax

By Dan Belson, Baltimore Sun (TNS)

Maryland’s highest court issued an order May 9 reversing a ruling by an Anne Arundel Circuit Court judge that struck down the state’s first-in-the-nation tax on digital advertising.

The order by the Maryland Supreme Court, which did not have an accompanying opinion Tuesday evening, vacated Anne Arundel Circuit Judge Alison L. Asti’s decision striking down the law, holding the lower court lacked jurisdiction in striking down the tax.

Asti ruled that the tax on digital advertising violates the federal Internet Tax Freedom Act, which prohibits discrimination against electronic commerce, as well as the U.S. Constitution’s prohibition on state interference with interstate commerce. Her decision in October prompted former Comptroller Peter Franchot to call the tax “constitutionally questionable” and recommend against continuing to defend the law.

Franchot’s successor, Comptroller Brooke Lierman, struck a different tone after the latest ruling, saying in a statement that she was grateful for the state’s defense and that her office is “committed to fairly administering” the tax.

The Tuesday order, signed by Chief Justice Matthew J. Fader, does not make any ruling about whether the tax itself is constitutional, only striking Asti’s decision because the plaintiffs, Verizon Media and Comcast, “failed to exhaust their administrative remedies.”

The order was issued in the name of the state’s highest court rather than any of the seven individual justices, and came only four days after the high court heard oral arguments on the matter.

The tax on digital advertising was approved by the state legislature’s Democratic majority over the veto of Republican former Gov. Larry Hogan, in an effort to bring in an estimated $250 million in revenues a year to support the Blueprint for Maryland’s Future.

The state has been collecting the taxes during the legal challenges, receiving just under $107 million from companies subject to the tax and issuing $14.5 million in refunds as of April 30, according to the comptroller’s office. The annual 2022 return for those taxes was due April 17, and any taxpayer who delayed filing a return because of the court case should file one and remit their tax payment as soon as possible, according to the office.

Maryland Attorney General Anthony Brown, whose office defended the law in court, said in a statement Tuesday evening that he applauded the court for “acting quickly because the revenues generated by this tax will help us provide our children the best education possible for success.”

“It will help level the playing field so that underserved communities will have access to quality educational opportunities enjoyed by our highest performing schools,” Brown said.

Julia Bernhardt, an attorney from Brown’s office, said during Friday’s oral arguments that the plaintiffs bypassed administrative procedures that the state has in place, such as presenting the matter to the Maryland Tax Court, The Associated Press reported.

“This court has repeatedly held that constitutional claims are to be presented to the tax court. In case, after case, after case, almost every case involving a constitutional challenge to a state tax has come up through that way since the establishment of the tax court,” Bernhardt said.

Michael Kimberly, an attorney for the plaintiffs, argued that the tax is “very unconstitutional,” because it targets electronic commerce in violation of federal law, as well as out-of-state companies in violation of the Dormant Commerce Clause—a body of case law inferred from the Constitution’s Commerce Clause that prohibits state legislation discriminating against or unduly burdening interstate commerce. He also said it targets speech and speakers in violation of the First Amendment.

The Maryland Chamber of Commerce issued a statement Wednesday noting the court’s ruling was procedural.

“The Maryland Chamber of Commerce and the Maryland Tech Council previously opposed the digital ad tax legislation,” the statement said. “If allowed, the law would levy a first-in-the-nation tax that would impact Maryland businesses of all sizes that utilize online advertising. This legislation puts Maryland businesses at a competitive disadvantage by making online advertising more expensive here than in 49 other states and could ultimately result in the loss of business investment and growth in the state.”

Baltimore Sun reporter Sam Janesch contributed to this article.

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