Maryland Court Strikes Down Digital Ad Tax

BDO Insights 

• The order itself is not surprising as many practitioners believe the tax is unconstitutional and violates federal law.
• Reports have indicated that the president of the Maryland senate would like to appeal the case or amend the legislation and that the attorney general, who would handle the appeal, plans to do so.
• The judge’s decision was initially issued via a bench order. The bare-bones written order does not include much of the judge’s thought process behind her reasoning that the tax is unconstitutional and violates ITFA. As a result, practitioners could look to the plaintiff’s briefs or wait for an appellate-level opinion to make similar challenges to other tax regimes.
• The U.S. Chamber of Commerce also brought a separate challenge in federal court.  (Chamber of Commerce of the United States of America v. Franchot, Civil Action No. 21-cv-00410-LKG (D. Md. March 4, 2022)).  In the federal case, the U.S. District Court for the District of Maryland concluded that the Tax Injunction Act barred the challenge in federal courts. However, the judge did rule that businesses could challenge the provision prohibiting them from directly passing the cost of the tax to their customers. The lone remaining issue of that challenge is still pending in federal court.
• Will this Maryland ruling stop other states from implementing a similar tax? Will those states wait for an appellate court ruling in their favor before implementing a similar tax? Only time will tell. However, states have been consistently creative in trying to find ways to tax the digital economy.