Federal judge sides with Maryland in digital ad tax dispute; state challenge remains pending

BALTIMORE — A federal judge has sided with Maryland in a dispute over the state’s digital advertising tax, dismissing a claim filed by the U.S. Chamber of Commerce and three trade associations arguing the tax violates First Amendment rights to free speech.

The decision, issued Wednesday by U.S. District Court Judge Lydia Kay Griggsby, found that language included in the tax’s “pass-through prohibition,” which bars digital advertising companies from passing along the tax as a “fee, surcharge or line-item,” does partially restrict the speech of the companies. However, the plaintiffs failed to prove that the measure was wholly restrictive and unconstitutional, Griggsby ruled.

Companies could still pass the tax onto customers indirectly as a price increase, Griggsby noted, and were still free to communicate the reasoning for the increase to customers or others.

“The statute’s unconstitutional applications do not substantially outweigh its constitutional ones,” she wrote.

The decision is the latest salvo in a lengthy legal dispute over the first-of-its-kind tax which was instituted in 2021. At the time, the Maryland General Assembly overrode a veto from then-Gov. Larry Hogan, a Republican, to impose the tax which was estimated to raise about $250 million annually to pay for the Blueprint for Maryland’s Future, a sweeping education package. The law taxes revenue that digital advertising providers collect on ads shown in Maryland.

Opponents have challenged the tax in both state and federal court. Wednesday’s ruling settles only the federal side of the claim, which was first filed in February 2021. All counts were initially dismissed by a U.S. District Court, but the U.S. Court of Appeals for the 4th Circuit overturned a portion of that ruling in January, ordering Griggsby’s court to hear the First Amendment question. The 4th Circuit found the lower court erred in dismissing the concerns as moot as the state lawsuit was still “unquestionably live” following a Maryland Supreme Court decision.

Verizon and Comcast found initial success in state court with an October 2022 decision from an Anne Arundel County judge striking down the tax. They argued the tax violated both the United States and Maryland constitutions as well as the federal Internet Tax Freedom Act. The Maryland Supreme Court reinstated the levy in May 2023, arguing the companies had not first gone through the proper administrative process — seeking a decision from the Maryland Tax Court.

At least 13 companies have filed challenges in Maryland Tax Court. The court heard the first from tech giant Apple in November. That case and others remain pending.

The Maryland Digital Ad Tax Act has continued to be enforced as the legal actions play out, collecting more than $170 million since 2022 from some of the nation’s largest technology firms including Facebook, Google and Amazon.

In her ruling Wednesday, Griggsby agreed in part with an argument made by the Chamber of Commerce that the pass-through prohibition, specifically language barring companies from charging a specific “fee, surcharge or line-item” to pass the tax along to customers, restrains speech. Griggsby called the language “more problematic” than a basic ban on passing the charge along to customers, which would regulate “non-expressive conduct.”

However, law requires the Chamber of Commerce to show that a “substantial number” of the tax’s applications are unconstitutional, Griggsby wrote. The plaintiffs failed to meet that standard, she said.

So long as a company does not directly pass the cost of the tax via a fee, surcharge of line-item, “the statute places no limitations or constraints on what the taxpayer can communicate about the tax, whether it be stating the amount of the digital ad tax or expressing any view the taxpayer might have about the tax,” Griggsby wrote.

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