Annapolis, Md. – Maryland’s first-ever tax on digital advertising violates the Constitution, a federal appeals court says, because blocking big tech from charging customers for the tax violates the companies’ right to free speech.
Supporters say Maryland should have overhauled its tax methods in response to significant changes in the way businesses advertise. The tax targets large companies that make money from online advertising, such as Meta, Google and Amazon, who they say are being unfairly targeted.
The ongoing legal battle is being watched by other states considering taxes on online advertising. Maryland estimates the tax could raise about $250 million a year to help pay for a broad K-12 education initiative.
Maryland law says businesses must not only pay the tax but also avoid telling customers how it affects pricing, with no line items, surcharges or fees, an appeals court said Friday, sidestepping trade associations fighting the tax.
Justice Julius Richardson cited the colonial-era Stamp Act that helped spark the Revolutionary War and wrote that “criticism of government—taxes or otherwise—is an important discourse in a democratic society.”
The plaintiffs alleged that Maryland lawmakers were trying to insulate themselves from criticism and political accountability by prohibiting companies from explaining the tax to their customers.
“The state cannot duck criticism by silencing those affected by its tax,” the judge wrote.
The unanimous decision of the 4th U.S. District Court of Appeals reverses the decision of U.S. District Judge Lydia Kay Griggsby and remands the case to her with instructions to consider an appropriate remedy in light of the commission’s decision.
Trade groups praised the decision.
“Maryland tried to deflect criticism of its tax scheme, and the Fourth Circuit recognized this tactic for what it was: censorship,” Paul Taske, co-director of the NetChoice Litigation Center, said in a statement.
Maryland Comptroller Brooke Lierman, who is a defendant in the case, and the Maryland Attorney General’s Office, which represents the state, declined to comment Monday.
The law has been challenged in several legal venues, including the Maryland Tax Court, where the case is pending.
The law imposes a tax based on global annual gross revenue for companies that earn more than $100 million worldwide.
Under the law, the tax rate is 2.5% for companies earning more than $100 million in global gross annual revenue; 5% for companies earning $1 billion or more; 7.5% for companies earning $5 billion or more, and 10% for companies earning $15 billion or more.
The Maryland General Assembly, which is controlled by Democrats, overrode a legislative veto in 2021 by Larry Hogan, a Republican.
