Maryland Digital Advertising Tax Struck Down: Implications for State Revenue Models

A First-in-the-Nation Experiment in Digital Taxation

In 2020, Maryland became the first state in the country to enact a tax specifically targeting the gross revenues of digital advertising services. The Digital Advertising Gross Revenues Tax, codified at Md. Code Ann., Tax-General §§ 7.5-101 et seq., was designed to capture revenue from large technology companies whose advertising businesses—display ads, search ads, and similar services delivered on digital platforms—had largely escaped traditional state tax frameworks built around tangible goods and physical presence.

The legislation, originally passed as House Bill 732, imposed a tiered tax ranging from 2.5% to 10% on the annual gross revenues derived from digital advertising services in Maryland, with the rate scaling based on a company's global annual gross revenue. Governor Larry Hogan vetoed the bill, citing concerns that it would raise costs for consumers and small businesses, but the Maryland General Assembly overrode that veto in February 2021, making the tax law.

From the outset, the statute was viewed by tax practitioners and industry groups as constitutionally precarious. What has followed is a multi-year litigation saga that offers a instructive case study for any state considering a similar approach to taxing the digital economy.

The Litigation Path: A Multi-Front Challenge

The tax was challenged almost immediately on two parallel tracks. In federal court, the U.S. Chamber of Commerce and several trade associations filed suit against the Comptroller of Maryland, arguing that the tax violated the federal Internet Tax Freedom Act (ITFA), the dormant Commerce Clause, and the First Amendment. The federal district court largely deferred to principles of comity and the Tax Injunction Act, sending most of the substantive tax claims back to Maryland's state courts while allowing a narrower First Amendment claim—challenging the statute's prohibition on passing the tax's cost directly through to consumers—to proceed federally.

Separately, and more consequentially, Comcast and Verizon pursued administrative and judicial challenges within Maryland's own tax adjudication system. That litigation ultimately reached the Circuit Court for Anne Arundel County, where the court issued a sweeping ruling invalidating the tax on multiple independent constitutional grounds. The Comptroller appealed, and the matter proceeded to Maryland's highest court, which addressed the case on procedural and jurisdictional grounds—underscoring that even a favorable substantive ruling can be unwound by threshold questions about administrative exhaustion. The result has been a case that has traveled through the Maryland Tax Court, a circuit court, and the state's Supreme Court, with the constitutional merits repeatedly resurfacing at each stage.

Core Constitutional Vulnerabilities Identified

Regardless of the precise procedural posture at any given moment, the substantive constitutional problems identified in this litigation are instructive for any jurisdiction contemplating a comparable digital services levy:

• Internet Tax Freedom Act preemption. The ITFA prohibits states from imposing taxes that discriminate against electronic commerce relative to comparable transactions conducted through other means. Because Maryland's tax applied to digital advertising but not to functionally similar print, broadcast, or billboard advertising, courts found a strong argument that the tax singled out digital commerce for disparate treatment.

• Dormant Commerce Clause concerns. The tax's revenue-sourcing methodology—apportioning gross revenue based on the location of digital devices accessing advertisements—raised significant extraterritoriality and apportionment concerns. Critics argued the formula effectively taxed activity with insufficient connection to Maryland and risked inconsistent, duplicative taxation across states.

• First Amendment implications of the pass-through prohibition. Perhaps the most durable vulnerability concerned a provision barring companies from directly passing the tax's cost onto Maryland customers through separate fees or line-item charges. Courts have found this restriction problematic as a content-based restriction on commercial speech, since it dictated how and whether businesses could communicate pricing information to customers.

Why the Procedural Posture Matters

For practitioners advising clients on multistate tax exposure, the Maryland saga underscores a critical lesson: constitutional infirmity and litigation success are not the same thing. Even where a tax exhibits clear structural weaknesses, taxpayers must navigate exacting procedural requirements—exhaustion of administrative remedies, payment under protest, and proper forum selection—before a court will reach the merits. A state's tax administration apparatus, including bodies like the Maryland Tax Court, often serves as a mandatory gatekeeper, meaning constitutional challenges can be delayed or redirected for years even when ultimately meritorious.

This matters enormously for revenue forecasting. States that model budgets around anticipated digital tax revenue must account not only for litigation risk but for the multi-year timelines inherent in tax controversy practice.

Implications for Other States Eyeing Digital Service Taxes

Maryland's experience has not deterred other states from exploring similar mechanisms. Legislators in New York, Connecticut, Indiana, and several other states have introduced or considered digital advertising or digital services tax proposals in recent years. The Maryland litigation offers those states a roadmap of pitfalls to avoid:

• Avoid drafting definitions that facially distinguish digital commerce from analogous non-digital transactions.
• Ensure apportionment formulas are grounded in verifiable, non-speculative sourcing data rather than proxies like IP-address-based device location.
• Refrain from restricting how businesses communicate pricing or tax costs to customers, given First Amendment commercial speech protections.
• Build robust administrative appeal structures that can withstand scrutiny while still allowing meaningful judicial review.

Strategic Considerations for Affected Businesses

Companies operating in the digital advertising space, and their counsel, should treat the Maryland litigation as a live, evolving matter rather than a settled precedent. Key considerations include:

• Preserving refund claims and protest rights in any jurisdiction that enacts a similar tax, given the procedural exhaustion requirements highlighted in the Maryland case.
• Monitoring parallel legislative activity in other states, since successful models—or failed ones—tend to migrate across state lines quickly.
• Evaluating contractual pass-through mechanisms carefully, particularly where state law restricts direct surcharge disclosures.

Outlook

The Maryland digital advertising tax controversy is far from a footnote in state tax history—it is likely to serve as the primary reference point for digital taxation litigation nationally for years to come. Whether the tax ultimately survives in some modified form or is permanently dismantled, the constitutional and procedural lessons from this litigation will shape how states draft, and how businesses challenge, the next generation of digital economy taxes.