The Maryland Tax Court has struck down the state's first-in-the-nation digital advertising tax on three separate constitutional grounds, ordering full refunds with interest to taxpayers after the tax collected less than $100 million since its 2021 enactment. According to an analysis published by the National Taxpayers Union Foundation, the court ruled in favor of Apple, Google, and Peacock in separate cases, finding that Maryland's tax violates the Internet Tax Freedom Act, the dormant Commerce Clause, and the Due Process Clause. The decision marks the latest legal defeat for a levy that lawmakers passed over Governor Larry Hogan's veto, hoping to generate $250 million annually while pushing consumers toward paid subscription services.
The tax applies exclusively to digital advertising, not all forms of advertising, and targets only companies with global revenues of at least $100 million—a threshold that "few, if any" Maryland-based businesses meet, according to the court. The levy imposes rates up to 10% on revenues rather than profits, with the exact rate determined by a company's total worldwide revenue instead of its Maryland-specific income. Two advertisers earning identical revenue within Maryland could face vastly different tax rates based solely on how much they earn outside the state. Collections fell short of projections by more than 60%, bringing in under $100 million compared to the anticipated $250 million annual haul.
The court found that digital advertising and traditional advertising share a fundamental characteristic: "The purpose of digital advertising services is the same as the purpose of non-digital advertising services, i.e., to make an impression on receivers of the advertising that leads to a sale of goods or other action." Because Maryland doesn't tax advertisements on billboards, signs, and other media, the special levy on digital ads violates the Internet Tax Freedom Act's prohibition against taxing internet commerce when states don't tax "similar" offline activity. The court also ruled that basing tax rates on global revenue creates improper apportionment, since the levy isn't aimed at Maryland-specific activity but instead targets "the very fact that the taxes are determined by and set by interstate commerce."
The analysis explains that Maryland's approach runs counter to constitutional requirements for state taxation of interstate business. The dormant Commerce Clause demands that states only tax activity with substantial connection to the taxing state and fairly divide the tax burden to reflect in-state activity. By setting rates according to worldwide earnings and falling almost entirely on out-of-state companies, Maryland's tax discriminates against interstate commerce rather than treating it evenhandedly with only minor effects, as Supreme Court precedent permits. This same global revenue framework also triggered the due process violation, since companies face taxation and rate determination based on business conducted far beyond Maryland's borders.
The National Taxpayers Union Foundation warns that other states considering similar levies should take note of Maryland's "years of litigation uncertainty ending in complete refunds for taxpayers." A separate federal court already struck down another provision of the Maryland law last year—a ban on companies listing the tax separately on customer receipts—ruling it violated the First Amendment. Additional cases remain pending, though Maryland may appeal to the state circuit court. The analysis notes that the odds of the state prevailing "dim with each new legal defeat," leaving the pioneering tax effort in tatters and taxpayers awaiting their refunds plus interest.