The Maryland Tax Court issued a decision on Friday morning that invalidates a pioneering state tax on certain digital advertisements, ruling it as a breach of the federal Internet Tax Freedom Act.
The court’s ruling stems from three separate legal challenges filed against the tax by major tech companies including Apple, Google, and the streaming service Peacock TV.
As part of its decision, the court has mandated that the state provides refunds for the taxes that were previously collected along with accrued interest. An official from the Office of the Comptroller noted that the office is currently reviewing the implications of the ruling.
This tax, regarded as a first-of-its-kind, has faced numerous challenges in both state and federal courts since its introduction. In fact, segments of the tax law were previously deemed unconstitutional by a federal appeals court last year, after it was found to violate First Amendment rights.
The legislation enacted in 2021 primarily affects major technology corporations, including giants like Apple, Meta, and Google. The law imposes a tax of 2.5% on companies that report global annual revenues of at least $100 million. This rate is designed to scale up, reaching a maximum of 10% for those organizations reporting over $15 billion in gross global revenue.
The state projected that this digital advertising tax could generate approximately $250 million annually, as highlighted in a legislative analysis. The revenue was intended to support the state’s education reform initiatives.
In October, the comptroller’s office disclosed that it had collected more than $400 million in relation to this tax.
The funds generated from this taxation were meant to alleviate the costs associated with the Blueprint for Maryland’s Future education program, a program responsible for contributing to billions of dollars in projected structural budget shortfalls. As the state enters next year, it faces a daunting projected budget gap exceeding $3 billion, exacerbated by costly components of the education initiative coming into effect.
A representative for Senate President Bill Ferguson (D-Baltimore), who was among the sponsors of the 2021 tax legislation, was not immediately available to provide a statement following the ruling.
However, Doug Mayer, president of Americans for Digital Opportunity, commended the court’s decision. He stated, “Today’s ruling validates what every person with the most basic understanding of tax law has been saying for over six years — digital advertising taxes are illegal on multiple levels. If elected officials genuinely seek to boost revenue, they should be nurturing entrepreneurs instead of implementing unlawful taxes that hinder the drivers of our economy.”
