On May 9, 2023, the Maryland Supreme Court vacated an order issued by the Circuit Court of Anne Arundel County that had stricken the Maryland Digital Advertising Services Tax.1 While not addressing the substantive arguments concerning the validity of the tax, the Supreme Court held that the circuit court lacked jurisdiction over this action because the plaintiffs failed to exhaust their administrative remedies. The circuit court had invalidated the tax on a variety of constitutional grounds.2 Subject to future challenges by taxpayers that eventually exhaust their administrative remedies, the tax is in effect for the 2022 tax year and thereafter.
In February 2021, the Maryland legislature enacted the Maryland Digital Advertising Services Tax following an override of a veto by former Maryland Governor Larry Hogan.3 The tax is imposed on entities with global gross revenues of at least $1 billion.4 Companies having at least $1 million of annual gross revenues derived from digital advertising services in Maryland in a calendar year are required to file a tax return.5 “Digital advertising services” are defined to include advertising services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising and “other comparable advertising services.”6 The applicable tax rate ranges from 2.5% to 10% based on the amount of a company’s global gross revenues.7 The annual gross revenues derived from digital advertising services in Maryland are determined using an apportionment ratio of Maryland to U.S. gross revenue derived from digital advertising services.8
Although the tax was initially intended to be effective beginning in the 2021 tax year, emergency legislation enacted in April 2021 delayed the tax’s effective date to the 2022 tax year due to various difficulties in implementing the tax.9 The corrective legislation amended Maryland law to specify that “digital advertising services” do not include advertising services or digital interfaces owned or operated on behalf of a broadcast or news media entity.10 The legislation also prevents digital advertisers from passing on the cost of the tax to customers purchasing digital advertising services via a separate fee, surcharge or line-item.11
Following enactment of the tax, two separate lawsuits were filed in both federal and state court challenging the legality of the tax under the ITFA,12 the Commerce and Due Processes Clauses of the U.S. Constitution, and the First Amendment to the U.S. Constitution. In the federal lawsuit, four business groups sought a declaration and injunction from a Maryland federal district court against enforcement of the tax.13 In March 2022, the federal court dismissed much of the lawsuit, ruling that the federal Tax Injunction Act (TIA) bars a challenge to the tax because Maryland state courts provide a plain, speedy and efficient remedy to challenge the tax. However, the federal court also ruled that the plaintiffs could still challenge the provision that prohibits companies from directly passing the cost of the tax onto customers. The remaining issue in that case was whether the pass-through prohibition violates companies’ free speech rights under the First Amendment as opposed to merely regulating their conduct. In December 2022, following the state court’s decision invaliding the tax, the federal district court issued an order dismissing the case on the grounds that the pass-through provision issue had become moot in light of the state court’s decision to invalidate the tax.14 The plaintiffs in the federal action have appealed this decision to the Fourth Circuit of the U.S. Court of Appeals.15
In the state lawsuit, Comcast and Verizon filed a complaint in the Circuit Court for Anne Arundel County, a state court, seeking a declaration that the tax is illegal under the ITFA, and also alleging Commerce Clause, Due Process and First Amendment violations.16 In March 2022, the circuit court ruled that the litigation may proceed after finding that the companies were not first required to exhaust their administrative remedies before bringing the lawsuit in state court. On April 5, 2022, the Maryland Comptroller and the plaintiffs both filed motions for summary judgment. The Comptroller argued that the circuit court lacked jurisdiction because the plaintiffs had failed to exhaust their administrative remedies. The plaintiffs argued that the tax violates federal law and is unconstitutional. In October 2022, after oral arguments, the circuit court issued a bench ruling followed by a brief order declaring that the tax: (i) discriminates against companies providing digital advertising services in violation of the ITFA; (ii) targets out-of-state companies and interstate commerce by using worldwide gross revenues to calculate the tax; and (iii) singles out certain companies for selective taxation in a way that is not content-neutral. On Nov. 18, 2022, the circuit issued a final declaratory judgment.
The Maryland Supreme Court granted the Comptroller’s request to review this case. The Comptroller also filed a motion to stay the circuit court’s judgment pending appeal and argued that a stay was needed to prevent interference with the assessment and collection process before the plaintiffs had exhausted their administrative remedies. The Supreme Court denied the Comptroller’s motion to stay the judgment.
The Maryland Supreme Court heard oral arguments on May 5, 2023, and issued an order vacating the circuit court’s order just four days later. In the brief order, which did not address the merits of the arguments concerning the validity of the tax, the Supreme Court provided that “the Supreme Court of Maryland, a majority of the Court concurring, HOLDS that the Circuit Court for Anne Arundel County lacked jurisdiction over this action because the appellees failed to exhaust their administrative remedies.”17 The Supreme Court indicated that the specific reasons for vacating the circuit court’s order will “be stated later in an opinion to be filed.” The Supreme Court’s order vacated the prior orders issued by the circuit court,18 and remanded the action to the circuit court with directions to dismiss the action.
While there is lingering uncertainty concerning what will ultimately happen with respect to the Maryland Digital Advertising Services Tax litigation following the Maryland Supreme Court’s order, for now, the tax is in effect. Because the Supreme Court vacated the circuit court’s order and did not address the plaintiffs’ substantive arguments, taxpayers no longer have a state court decision supporting an argument that the tax is unenforceable. On May 10, 2023, the Maryland Comptroller issued an updated version of its guidance on the tax to reflect the Supreme Court’s order.19 The revised guidance notes that the annual return for the 2022 tax year was due on April 17, 2023. Taxpayers who delayed filing a 2022 return pending the outcome of this case are directed to file their return and remit their tax payment as required by statute. The guidance provides instructions for complying with the tax.
As a result of the Supreme Court’s order, parties seeking to challenge the digital advertising tax in state court are first required to “exhaust their administrative remedies.” Taxpayers could fulfill this requirement by filing a digital advertising tax return and paying the tax before commencing a refund action that could be considered by the Maryland Tax Court. This requirement will make it relatively unlikely that the constitutionality of the tax will be resolved in state court in the near future. As the Maryland Supreme Court has promised a more expansive opinion explaining why it vacated the circuit court’s orders, perhaps such opinion will provide further guidance on what it means in this case to exhaust administrative remedies. At the moment, it would not appear that the opinion would address substantive aspects of whether the tax passes constitutional muster.
Meanwhile, the federal court challenge continues. Similar to the state litigation, the federal litigation has experienced some procedural hurdles. In the federal litigation, the district court ruled that the federal TIA barred the plaintiffs from challenging the tax itself but that the plaintiffs could proceed with their challenge to the tax’s pass-through prohibition on the grounds that it violated the First Amendment. The federal litigation was dismissed by the U.S. district court in December 2022 following the state circuit court’s decision to invalidate the tax. While this dismissal was appealed and currently is being considered by the Fourth Circuit of the U.S. Court of Appeals, the Maryland Supreme Court’s order may affect the federal litigation because the state court ruling invalidating the tax has been vacated.
Maryland undoubtedly will continue to defend this tax because it generates considerable revenue. According to arguments before the Supreme Court, the state has collected approximately $107 million from this tax and refunded more than $14 million to taxpayers requesting that their payments be returned.20 Maryland Attorney General Anthony Brown issued a statement praising the Supreme Court for “acting quickly” because the revenues generated by the tax are being used to improve the state’s education system.21
This tax has received considerable attention because Maryland was the first state to enact a tax on digital advertising revenue. The circuit court’s decision last year striking down the tax may have discouraged other states from pursuing similar digital advertising tax proposals. The Supreme Court’s decision to vacate the circuit court’s order will provide states with a choice: proceed with their efforts to impose their own digital advertising taxes even though such taxes have not passed substantive scrutiny or wait a little longer to see whether future litigation confirms or invalidates the Maryland tax.
1 Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia, LLC v. Comptroller of the Treasury of Maryland, Maryland Supreme Court, No. SCM-REG-0032-2022, order issued May 9, 2023.
2 Circuit Court for Anne Arundel County, Md., No. C-02-cv-21-000509, order issued Oct. 20, 2022. For further discussion of this order, see GT SALT Alert: Maryland court invalidates state’s Digital Advertising Services Tax.
3 Ch. 37 (H.B. 732), Laws 2021, enacting Md. Code Ann., Tax-Gen. §§ 7.5-102-7.5-301. For further discussion of the tax, see GT SALT Alert: Maryland enacts digital ad gross revenues tax.
4 Md. Code Ann., Tax-Gen. § 7.5-303.
5 Md. Code Ann., Tax-Gen. §§ 7.5-201(a); 7.5-301(a).
6 Md. Code Ann., Tax-Gen. § 7.5-101(e)(1).
7 Md. Code Ann., Tax-Gen. § 7.5-103.
8 Md. Code Ann., Tax-Gen. § 7.5-102(b)(1).
9 Ch. 669 (S.B. 787), Laws 2021.
10 Md. Code Ann., Tax-Gen. § 7.5-101(e)(2).
11 Md. Code Ann., Tax-Gen. § 7.5-102(c).
12 Pub. L. No. 105-277, 47 U.S.C. § 151. Among other things, the ITFA preempts state and local governments from imposing taxes on internet access services and discriminatory taxes on electronic commerce.
13 U.S. Chamber of Commerce v. Franchot, U.S. District Court for the District of Maryland, North Division, No. 1:21-cv-00410, filed Feb. 18, 2021.
14 U.S. District Court for the District of Maryland, North Division, No. 21-cv-00410, order issued Dec. 2, 2022.
15 U.S. Chamber of Commerce v. Lierman, U.S. Court of Appeals for the Fourth Circuit, No. 22-2275, appeal filed Dec. 15, 2022.
16 Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia, LLC v. Comptroller of the Treasury of Maryland, Circuit Court for Anne Arundel County, Md., No. C-02-cv-21-000509, complaint filed Apr. 15, 2021.
17 Emphasis in original.
18 The prior orders included: (i) the March 14, 2022 order denying in part the Comptroller’s motion to dismiss; (ii) the Oct. 21, 2022 order granting in part the plaintiffs’ motion for summary judgment and denying the Comptroller’s motion for summary judgment; and (iii) the Nov. 18, 2022 final declaratory judgment.
19 Maryland Tax Alert: Publication of Digital Adverting Gross Revenues Tax Return, Maryland Comptroller, updated May 10, 2023. This guidance originally was published on Feb. 27, 2023.
20 Bryan P. Sears, State Supreme Court overturns digital ad tax ruling, Maryland Matters, May 9, 2023.
21 Press Release, Attorney General Anthony Brown’s Statement on Maryland Supreme Court Decision on Digital Ad Tax, Office of Maryland Attorney General, May 9, 2023.
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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