A Maryland tax court has struck down the state’s digital advertising tax as unconstitutional, according to a release from the Tax Foundation.
Marylandmatters.org described the tax as a “first-of-its-kind state tax on some digital ads” and said the court found it violated the federal Internet Tax Freedom Act.
“In the context of the ITFA (Internet Tax Freedom Act) … the Court reasons that Congress could not have been any clearer that it did not want internet services of any kind taxed unless other similar services in the broader sense were taxed,” the tax court wrote.
The decision, issued late last week, responds to suits filed by Apple, Google and Peacock TV.
According to the Tax Foundation, “federal law prohibits discriminatory taxation of e-commerce, and in particular, it prohibits any tax that singles out e-commerce while not taxing “similar property, goods, services, or information” offline. Opponents of the digital ad tax have long argued that by taxing digital ads but not billboards, newspaper ads, television commercials, and other forms of advertising, the tax clearly violated ITFA.”
Maryland’s tax also violated the Commerce Clause, the court said.
“The tax’s thresholds are also designed in such a way as to disproportionately (arguably exclusively) tax out-of-state commerce,” the Tax Foundation wrote. “The Maryland Tax Court held that the graduated rates on global revenues violate the Complete Auto test for Commerce Clause compliance because it is not fairly apportioned, and because it lacks external consistency since the tax is on activity outside Maryland.”
“The economic reality is that the Tax in its everyday operation discriminates against more globally robust companies in interstate commerce to the advantage of the Maryland tax coffers,” the court wrote. “Global revenues have no relationship to in-state services under the Tax to those payors.”
Additionally, the court found that the digital advertising tax violated the Due Process Clause of the Constitution.
“The Due Process Clause has been held to impose two important requirements for taxes involving interstate commerce: (1) a minimal connection between the interstate activities and the taxing state, and (2) a rational relationship between the income attributed to the state and the interstate values of the enterprise,” the Tax Foundation wrote. “The court found that, for the same reasons that the tax violates the fair apportionment requirement under the Commerce Clause, it fails under the second Due Process requirement because the tax is discriminatory.”
The Tax Foundation called it a “robust win,’ noting the tax court had ordered the state to refund five and a half years’ worth of collections on the unconstitutional tax.
“The Maryland Tax Court is an administrative tribunal, and the state is likely to file for judicial review by the circuit court, which they must do within 30 days,” the Tax Foundation wrote. “Under today’s summary judgment, companies that paid the tax must receive refunds, though those refunds will presumably be stayed pending the circuit court’s review.”
The Tax Foundation said the state will likely seek review by the circuit court.
“If Maryland loses there as well, it remains to be seen whether the state would continue its appeals,” the Tax Foundation wrote. “The victory petitioners won today is overwhelming. It is the sort of ruling that should have the state very doubtful about its chances on appeal, and the longer the legal fight drags on, the worse Maryland’s budget situation will be when the state has to refund years of improperly collected taxes.
“Policymakers in Illinois and Utah, which adopted their own digital ad taxes this year, are surely paying attention. While those taxes aren’t designed identically to Maryland’s and wouldn’t face the exact same set of challenges, the Maryland court’s decisions on ITFA, fair apportionment, fair relation, and due process are of equal importance in those states and elsewhere. Lawmakers in other states considering a digital advertising tax should likewise take note of today’s result. It’s a look into their own future if they choose to adopt a similar tax.”
Kansas does not have a digital advertising tax, and this ruling should quell any thoughts of considering it.
