Maryland Supreme Court Dismisses Challenge to Digital Ad Tax; Controversial Tax Remains Enforceable

In a May 9 per curiam order, the Maryland Supreme Court dismissed Comcast’s challenge that Maryland’s digital advertising tax is unconstitutional and violates the Internet Tax Freedom Act (ITFA). The court did not address the merits of the case, instead dismissing on procedural grounds because Comcast failed to exhaust its administrative remedies before bringing the challenge in state court. 

Previously, a Maryland circuit court had granted summary judgment against the state, ruling that the digital ad tax was unconstitutional and violated the ITFA. The Supreme Court’s order instructs the circuit court to dismiss the case for the reasons stated above. 

On May 10, the Maryland Comptroller of Maryland issued a tax alert to address the impact of the court’s decision. “The annual return for digital advertising gross revenues tax for tax year 2022 was due on April 17, 2023,” the alert states. “Any taxpayer who delayed filing a 2022 digital ad tax return pending the outcome of Comptroller of Maryland v. Comcast should file their return and remit their tax payment as required by statute.” 

In a related case brought by the U.S. Chamber of Commerce, a federal district court ruled that the Tax Injunction Act (TIA) barred challenges of the state’s digital ad tax in federal courts. However, the court limited its dismissal, also holding that the TIA did not bar businesses from challenging in federal court the provision in the Maryland law that prevents businesses from directly passing the cost of the tax onto customers. That question is still pending before the court. 

 Because there have yet to be any successful challenges, Maryland’s digital advertising tax is enforceable. The comptroller’s alert clearly indicates that Maryland fully intends to enforce the tax beginning with the 2022 tax year. 

BDO Insights 

•  It is likely that taxpayers will again attempt to challenge the tax. However, because they must first exhaust their administrative remedies before bringing the challenge in state court, it will be some time before a court finally addresses whether the digital advertising tax is valid.
•  In the meantime, because no federal or state court has addressed the merits of the case, the digital ad tax is enforceable, and taxpayers that fall within the tax’s imposition statute should comply with the law.