A Maryland Tax Court has struck down the nation's first digital advertising tax, ruling it violates federal law and multiple constitutional provisions — a decision that casts serious doubt on a similar tax proposal championed by Michigan Gov. Gretchen Whitmer. The ruling, detailed in a new analysis from the Mackinac Center for Public Policy published this week, found Maryland's tax ran afoul of the federal Internet Tax Freedom Act as well as the interstate commerce and due process clauses of the U.S. Constitution. The center's report warns that Michigan lawmakers face the same legal obstacles if they pursue a digital ad tax, with lawsuits already filed in Utah and Illinois over their own versions adopted earlier this year.
Whitmer included a 4.7% excise tax on digital advertising in her budget proposal this year, though the measure didn't make it into the final package due to criticism of its economic effects and doubts it would survive legal challenge. Michigan's House Bill 4142 of 2025 offered one blueprint for the tax, closely mirroring the Maryland law that was just invalidated. Under both the Michigan bill and Maryland's struck-down statute, the tax applies to revenue companies earn from advertising within the state, but the rate — ranging from 2.5% to 10% — depends on the platform's global revenue. That means the tax owed is determined largely by factors completely outside Michigan's borders. Both proposals also base liability on a worldwide revenue threshold, and both include exemptions for newspapers and broadcast media that functionally exclude in-state taxpayers while targeting out-of-state companies.
The Maryland Tax Court concluded that using revenues from outside the state to set tax liability breached both the commerce clause and the due process clause. According to the report, the court found the tax violates three of the four elements of the Complete Auto test that governs whether a tax passes constitutional muster under the commerce clause: it isn't fairly apportioned, it discriminates against interstate commerce by specifically targeting out-of-state firms, and there's no fair relationship between the tax and services the company receives from the state. The court also ruled there was no rational connection between the income the tax attributes to Maryland and the interstate values of the taxed entities, violating the due process clause. The Mackinac Center notes that Maryland's court "made quick work" of several other defenses, including the state's claim that the Internet Tax Freedom Act itself violates the anti-commandeering doctrine — an argument the court rejected because regulating interstate commerce is a power explicitly granted to Congress by the Constitution.
Michigan could avoid some constitutional pitfalls by not incorporating foreign revenues into tax calculations, but the bigger obstacle is the Internet Tax Freedom Act itself, a federal statute that bars states from imposing discriminatory taxes on electronic commerce. States can't tax digital transactions unless they impose similar taxes on comparable offline transactions. That means Michigan can't tax digital advertising if it doesn't tax offline advertising platforms like television, radio, billboards, and direct mail ads. Digital ad tax supporters argue that online advertising is fundamentally different because of its targeting and tracking capabilities, but the Maryland court emphasized that direct mail is also highly programmatic, targeted, and tracked — and that advertising consists of paid messages to attract business regardless of medium. The report warns that even if Michigan redesigned its proposal to sidestep some of the Maryland law's flaws, "any tax on digital advertising would run headlong against federal law."
The Maryland Tax Court's decision doesn't bind Michigan courts, but the Mackinac Center argues lawmakers can't ignore its implications. Appeals will continue in Maryland, but the report says the outcome "is not in serious doubt" — eventually, Maryland will be forced to refund years of tax collections with interest. Michigan can learn from that experience and avoid the expensive and ultimately pointless legal battles that a digital advertising tax would trigger. Even with modifications to address specific constitutional concerns, any Michigan digital ad tax faces the same federal prohibition that doomed Maryland's version — and Michigan courts are extremely likely to reach the same conclusions.