Maryland’s first-of-its-kind gross revenue tax on digital advertising receipts was struck down last week by Maryland state circuit court judge Alison Asti who issued a bench ruling that the tax violates the Internet Tax Freedom Act.  In her order granting summary judgement for plaintiffs Verizon and Comcast, Judge Asti also ruled that the law violates the Supremacy Clause, Commerce Clause, First Amendment and Fourteenth Amendment of the U.S. Constitution.  See our previous alerts describing adoption of the novel tax over the governor’s veto, significant legal challenges, and legislative updates that exacerbate constitutional and enforceability issues (available here and here).

Brian Frosh, attorney general for Maryland, signaled plans to appeal Judge Asti’s ruling, notwithstanding statements from the state comptroller recommending that the suit be abandoned.  State Comptroller Franchot’s statement, issued last Thursday, expressed concern about “expend[ing] public resources to defend a law that was constitutionally questionable at the time of enactment.”

Maryland Senate President Bill Ferguson, co-sponsor of the original bill, strongly supported appeal of the state ruling.  Statements by Ferguson’s office supporting appeal make reference to a federal judicial ruling in separate litigation that granted the state’s motion to dismiss Tax Injunction Act challenges to the tax.  Notably, U.S. District Judge Lydia Griggsby only partially granted the state’s motion to dismiss in the federal challenge brought by trade groups representing technology companies.  The case is still pending a decision over First Amendment and Commerce Clause challenges.

In addition to tracking the progress of this case, companies with digital advertising receipts should carefully consider their filing position in Maryland and take care to preserve their right to claim refunds on tax paid.  Although this is an evolving issue, it is expected that this decision may chill digital ad tax proposals in other states, such as New York, Massachusetts, and New Mexico.  Please contact the authors to understand potential challenges to liability for the tax, potential sourcing methodologies, and guidance to preserve opportunities for refunds. 

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