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October 17, 2022
2022-1571

Maryland Circuit Court strikes down Digital Advertising Services Tax, citing violations of Internet Tax Freedom Act, Commerce Clause and First Amendment

According to an October 17, 2022, article in Tax Notes Today State, Anne Arundel County (MD) Circuit Court Judge Alison Asti held that the state's Digital Advertising Services Tax (DAT), which took effect on January 1, 2022,1 violates the Internet Tax Freedom Act (ITFA), as well as the Commerce Clause and the First Amendment, and is therefore invalid. In her bench ruling, Judge Asti requested that "plaintiffs' counsel submit a more specific proposed order" by October 21, 2022.2

A similar challenge to the DAT, brought in federal court, was largely dismissed on March 4, 2022, on grounds that the suit was barred by the federal Tax Injunction Act.3

Implications

Judge Asti's bench ruling does not settle the issue, as the Comptroller is expected to appeal the decision. Taxpayers that are subject to the DAT's estimated tax provisions, however, are relieved from filing and paying unless and until a higher court reverses the ruling. In the meantime, taxpayers should consider filing protective refund requests for amounts paid in the first three quarters of 2022. Once the proposed order is submitted and ruled upon on October 21, taxpayers should have more clarity on the issue and insight into the potential avenues for appeal by the Comptroller.

The ruling also calls into question whether similar and identical legislation introduced in other states will move forward or be reworked in the upcoming 2023 state legislative sessions.

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Contact Information
For additional information concerning this Alert, please contact:
 
State and Local Taxation Group
   • Karl Nicholas (Karl.Nicolas@ey.com)

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ENDNOTES

1 Maryland's DAT is imposed on the annual gross revenue derived from digital advertising in the state. The tax applies at a graduated rate that increases in increments based on the taxpayer's global annual revenues. For more on the DAT, see Tax Alerts 2021-0343 and 2021-0788.

2 Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-CV-21-000509 (Md. Cir. Ct. Anne Arundel Cty.).

3 See Chamber of Commerce of the United States of America et al. v. Franchot, Civ. No. 21-cv-410 (U.S. Dist. Ct. Md. N. Div.).

 

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