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March 4, 2022

Federal court rules challenge to Maryland's Digital Advertising Services Tax barred by Tax Injunction Act, but pass-through prohibition may be challenged

On March 4, 2022, Judge Lydia Kay Griggsby of the U.S. District Court for the District of Maryland concluded that the federal Tax Injunction Act (28 U.S.C. Section 1341) (TIA) bars a challenge to Maryland's new digital advertising services tax (DAT) in the federal courts. The court, however, determined that businesses subject to the DAT could challenge in federal court a provision prohibiting them from directly passing on the cost of the tax to their customers. Chamber of Commerce of the United States of America v. Franchot, Civil Action No. 21-cv-00410-LKG (D. Md. March 4, 2022).

The DAT, which became effective on January 1, 2022, applies to annual gross revenue derived from digital advertising in the state. Persons or entities that have at least $100 million in annual global revenue from all sources, and at least $1 million in annual Maryland revenue from providing digital advertising services must pay the DAT. The DAT applies at graduated rates, which increase based on the taxpayer's global annual revenues. It does not apply to most broadcast and news media entities. Businesses that are subject to the tax are statutorily prohibited from directly passing on the DAT's cost "to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item."1

The DAT currently is the subject of two legal challenges: one in state court and the present action in federal court. Both challenges claim that the DAT violates the Internet Tax Freedom Act (47 U.S.C. Section151), as well as the Due Process and Commerce Clauses of the U.S. Constitution. The federal challenge also asserts violations of the Commerce Clause and the First Amendment to the U.S. Constitution by prohibiting the direct pass-through of the tax.

The Maryland Comptroller of the Treasury (MD Comptroller) argued that the present challenge in the federal court is barred by the TIA, which provides that federal courts lack subject-matter jurisdiction to "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." The court agreed, noting that (1) the charge imposed by the DAT is a tax; and (2) Maryland law provides a plain, speedy and efficient remedy to challenge the tax in state court. Accordingly, the court dismissed the complaint for lack of subject-matter jurisdiction, under the TIA, without ruling on the substantive merits.

Regarding the challenge to the DAT's anti-pass-through provisions, the court noted that the TIA does not bar the issue from the federal courts because a challenge to the "assessment, levy or collection" of a tax is not involved. Rather, the court noted, that challenge concerns "whether the State of Maryland can prevent taxpayers who are liable to pay the charge imposed by the [DAT] from passing on the cost of this tax to consumers."


Despite the federal and state legal challenges to the tax, the DAT is currently effective. Persons and entities that provide digital advertising services to Maryland customers should assess whether they satisfy the DAT's revenue thresholds and whether they may qualify for any of the limited exceptions to the tax. The first returns and estimated payments are due on April 15, 2022. At the moment, an approved form for filing a return and reporting and paying the DAT has not been issued, although the regulations implementing the DAT were finalized in December 2021.2


Contact Information
For additional information concerning this Alert, please contact:
Sales and Use Tax Group
   • Michael Woznyk (
   • Karl Nicolas (


1 For more on the DTA, see Tax Alerts 2021-0788 and 2021-0343.

2 See COMAR Section to .06. See also Tax Alert 2021-2253.)