Maryland’s highest court revives tax on digital ads

Published 5/10/2023 8:50 a.m. EDT, Updated 5/10/2023 6:20 p.m. EDT

The Robert C. Murphy Courts of Appeal Building in Annapolis hosts the Court of Special Appeals and the Court of Appeals. A state constitutional amendment on the ballot in 2022 would rename the courts to the Appeals Court of Maryland and the Supreme Court of Maryland.

Maryland’s highest court revived a new tax on digital advertising that’s intended to fund a significant portion of an ambitious public school improvement program, overturning a lower court decision that made the tax unconstitutional.

The state was believed to be the first in the nation to levy a tax on digital ads in 2020, which quickly ran into opposition from tech companies, who said it was a punitive tax on big firms. Then-Gov. Larry Hogan vetoed the tax that year, calling it “misguided,” only to have the veto overturned by the Democratic-majority General Assembly in 2021.

The tax would apply to companies based on the amount of money they make from digital ads shown to Maryland consumers, ranging from 2.5% to 10%. The tax would only be paid by companies making at least $100 million per year globally from digital ads, such as Google and Facebook. They’d only pay taxes on their share of advertising within Maryland.

The money from the tax — up to $250 million per year — has been earmarked for the Blueprint for Maryland’s Future, an expensive and ambitious plan to improve public education through improved teacher training and pay, expanded career- and college-prep programs, additional community schools and other programs.

Proponents of the tax say that big tech companies should pay their fair share toward government programs that serve the greater good, such as education. But opponents say it violates the First Amendment and laws governing taxes on e-commerce and interstate commerce.

Businesses and tech companies took the law to court, and an Anne Arundel County judge initially sided with Verizon and Comcast against the tax. But the Supreme Court of Maryland, after hearing oral arguments last week, issued a brief order on Tuesday ruling in favor of the state.

The order did not lay out the court’s rationale for upholding the digital ad tax; that’s expected to come at a later date. But the order did say that Anne Arundel County Circuit Court lacked jurisdiction in the matter because the companies did not exhaust their administrative appeal options.

The companies, through an attorney, declined to comment.

But Americans for Digital Opportunity, an advocacy group funded by the advertising industry, issued a statement calling the ruling “unfortunate” because it’s based on a procedural issue, not the merits of the case.

“We look forward to seeing this unfair and unconstitutional tax face additional legal challenges, and we will continue to advocate for all people to have equal and affordable access to the digital tools that drive the American economy,” Doug Mayer, president of the organization, said in a statement.

Democratic politicians, meanwhile, praised the court order.

“Maryland still has a path to ensuring big tech pays its fair share while making billions of dollars a year using our personal data to sell digital ads,” said Senate President Bill Ferguson, a Baltimore Democrat who has been a chief proponent of the tax.

He added: “Fundamentally, the digital ad tax is about helping Maryland’s students in our most underfunded schools and small businesses who already pay their fair share in taxes to our state.”

Maryland Attorney General Anthony Brown, whose office defended the tax in court, praised the Supreme Court of Maryland’s decision.

“I applaud the Supreme Court for acting quickly because the revenues generated by this tax will help us provide our children the best education possible for success,” Brown, a Democrat, said in a statement. “The digital ad tax will support our collective goal of transforming schools across the State. It will help level the playing field so that underserved communities will have access to quality educational opportunities enjoyed by our highest performing schools.”

Comptroller Brooke Lierman, a Democrat whose office is responsible for collecting the tax, said the Supreme Court made an important decision in “ensuring that companies cannot circumvent the administrative appeals process.”

Meanwhile, another challenge to the digital ad tax is pending in a federal appeals court.

As the court cases have played out, some companies paid the digital ad tax for 2022 for a net total of $92.4 million received by the Office of the Comptroller. Businesses that have not paid their 2022 digital ad tax should do so now, the office said.

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