On May 9, 2023, the Maryland Supreme Court reversed a ruling by the Anne Arundel Circuit Court that Maryland’s tax on digital advertising was unconstitutional, saying the court lacked jurisdiction over the case. In an order, Chief Justice Matthew Fader punted the case back to the Anne Arundel County Circuit Court and ordered it to dismiss the case brought by Comcast of California, Maryland, Pennsylvania, Virginia and West Virginia LLC and others. He said the plaintiffs failed to exhaust administrative remedies through the state’s tax court before seeking intervention by the state courts — Reasons will be stated in a later opinion. The four-page order does not make any ruling on the constitutionality of the law. The plaintiffs will now need to bring their challenges before the tax court.
In March 2023, a joint amicus brief with several other advertising trades in favor of the plaintiffs (Comcast et. al) in the Maryland Supreme Court case.
From oral arguments in this case, it has been divulged that the state has received voluntary payments for digital advertising revenues of nearly $107 million, the comptroller’s office said; the state controller’s office has issued $14.5 million in refunds when taxpayers have asked for their money back. Legislative analysts for the state estimated the tax could raise about $250 million a year to help pay for education.
Claims in a federal case challenging the tax were dismissed for lack of jurisdiction and pending the decision in state court. An appeal by the U.S. Chamber of Commerce, NetChoice and Computer & Communications Industry Association remains pending in the Fourth Circuit appellate court.
As enacted, Maryland’s digital advertising tax applies to gross revenue derived from digital advertising services; it has a rate escalating from 2.5 percent to 10 percent of the advertising platform’s assessable base based on their annual gross revenues from all sources (i.e., not just digital advertising, and not just in Maryland). The potential passthrough effects of state digital advertising taxes could mean a sizable reduction in demand for agencies’ digital advertising services.
As currently designed, Maryland’s digital advertising tax’s graduated rate applies to entities with more than $1 million in gross revenues from digital advertising services in Maryland AND $100 million in annual gross revenues. However, it is not a typical progressive tax, as the rate applies to all taxed activity, not just the marginal amount.
Important for agencies, in 2021 the legislation’s lead Senate sponsor and President of the Maryland Senate, Bill Ferguson (D-46), clarified that he doesn’t believe that the tax would be levied against a company reselling ad space to a marketer client; instead, he explained that the legislative intention of the bill is to tax the digital company selling the original advertising space (i.e. Facebook, Google, etc.).
The legality of Maryland digital ad tax law is being watched closely by other states that have also weighed a similar tax for digital advertising. So far in 2023, a handful of states have introduced their own digital ad tax bills.
The CHC and 4A’s along with many other advertising industry partners submitted comments on the proposed regulations implementing the Maryland digital ad tax in November 2021. The tax took effect beginning January 1, 2022, with the first filing obligation for large taxpayers beginning in April 2022. The Maryland tax continues to make its way through the court system. There will not be a final resolution on the legality and constitutionality of the tax for several more months.