Taxpayers (and States) Take Notice: Invalidation of the Maryland Digital Advertising Tax Highlights the Importance of the Internet Tax Freedom Act in SALT Litigation | Skadden, Arps, Slate, Meagher & Flom LLP

Maryland Digital Advertising Tax

A Maryland state court struck down the state’s first state tax on digital advertising (Maryland Digital Advertising Tax) earlier this week.1 Set for February 2021, the Maryland Digital Advertising Tax was controversial even before it became law. Maryland Gov. Larry Hogan sponsored legislation that authorized the tax increase in 2020 and released it only after the Maryland House of Delegates and Maryland Senate voted to override the veto in early 2021.

Maryland’s digital media tax is imposed on businesses with at least $100 million in worldwide revenue and $1 million in gross receipts from digital media services in Maryland.2 This tax applies to the gross annual revenue of businesses from digital media services in Maryland. Maryland does not tax non-digital media. The term “digital advertising services” is defined to include “advertising services in digital media, including advertising in the form of standard advertising, search engine advertising, interstitial advertising, and other similar advertising services.” The term digital interface is defined as “any form of software, including a website, website component, or application, that can be accessed by a user.”3

The tax rate imposed by the Maryland Digital Advertising Tax is determined by reference to the taxpayer’s gross annual income. For taxpayers with annual worldwide gross income between $100 million and $1 billion, the tax rate is 2.5% of digital media activity in Maryland. For taxpayers with annual worldwide gross income between $1 billion and $5 billion, the tax rate is 5% of digital media activity in Maryland. For taxpayers with annual worldwide gross income between $5 billion and $15 billion, the tax rate is 7.5% of digital media services in Maryland. For taxpayers with annual worldwide gross income greater than $15 billion, the tax rate is 10% of digital media services in Maryland.4

Legal and tax challenges

Shortly after its implementation, the Maryland Digital Advertising Tax was challenged in both state and federal courts in Maryland.

Hours after the law was passed, the Chamber of Commerce and several trade groups, including Computer & Communications Corporation, filed a lawsuit in the US District Court for the District of Maryland.5 Federal cases have been well briefed and await oral argument and decision.

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In April 2021, seven divisions of Comcast and Verizon Media Inc. filed a lawsuit in Maryland Circuit Court challenging the Maryland Digital Advertising Tax under the Internet Tax Act (ITFA) and the due process clause of the US Constitution, the Commerce Clause and the First Amendment. After the recent oral arguments on the pending appeal in mid-October, the Maryland Circuit Court (Judge Alison L. Asti) ruled that the bench favored Comcast and Verizon. Although the text will come to an end, Judge Asti held that Maryland’s Digital Advertising Tax violated the ITFA as well as the Commerce Clause and the First Amendment of the Constitution.

Significance of Maryland Circuit Court Decisions on ITFA’s Nondiscrimination Act

Maryland isn’t the only state to recently consider a tax on digital media revenue. The Maryland Circuit Court’s ruling that an upcoming law would invalidate Maryland’s Digital Advertising Tax will tell if other states move forward with legislation that imposes a new tax on advertising revenue generated from their rights.

However, the significance of the decision is broader than its impact on the way advertising is taxed. The Maryland Circuit Court’s decision underscores the dangers digital business tax laws will face and the importance of non-discriminatory enforcement of the ITFA to taxpayers challenging those laws.

The ITFA was enacted in 1998 to provide a three-year moratorium on both (i) new state taxes on Internet services and (ii) “taxation or discrimination in electronic commerce.”6 The conclusion was later extended by three years until November 1, 2003;7 until November 1, 2007;8 until November 1, 2014;9 until December 11, 2014;10 and until October 1, 2015.11 On February 24, 2016, the moratorium was permanently extended.12 Unless and until repealed or materially amended, the ITFA will continue to prohibit any state tax on Internet services and any state tax that is or is a “tax”.13 or “tax discrimination”14 and “electronic commerce.”15 In summary, the following ITFA laws prohibit a country from adopting (among other tax laws):

  • a tax that makes the same internet transaction subject to tax in more than one jurisdiction without credit being paid;
  • taxes imposed on Internet transactions that do not apply to transactions completed through other means;
  • a tax that imposes a higher rate of tax on Internet transactions than is imposed on transactions accomplished through other means; or
  • a tax that imposes the collection or payment of any fee for Internet transactions that is different from the collection and / or payment of fees in transactions accomplished through other means.
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During its first 25 years, ITFA did not play a prominent role in state and local tax (SALT) litigation. Given the growing number of digital businesses, the political and financial pressures that led to Maryland’s digital media tax and the importance of the image in the recent Maryland court case, ITFA’s dormancy has exhausted. Both states and taxpayers should prepare for the ITFA to play an important role in the resolution and adjudication of SALT disputes.


1 Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Treasurer of Marylandcase number C-02-CV-21-000509, in the Circuit Court for Anne Arundel County, Maryland.

2 Md. Tax laws. 7.5-103, 7.5-201.

3 Md. Tax Law 7.5-101.

4 Md. Tax Law 7.5-103.

5 US Chamber of Commerce et al. v. Peter FranchotCase number 1: 21-cv-00410 (USDC, D. Md.).

6 105 PL 277, Section 1101(a), October 21, 1998.

7 107 PL 75, November 28, 2001.

8 108 PL 435, December 3, 2004.

9 110 PL 108, Oct. 31, 2007.

10 113 PL 164, September 19, 2014.

11 113 PL 235, December 16, 2014.

12114 PL 125, February 24, 2016.

13 The term “tax” is defined as any tax “imposed by a state or political subdivision on an electronic market which is also subject to another tax of the state or political subdivision granted (or not at the same rate or on the same basis), without a credit (for example, a resale exemption) for taxes paid in other jurisdictions.”

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14 The term “discriminatory tax” is defined as:

(A) Any state or political tax imposed on electronic commerce and:

(i) does not apply general laws and collect laws from such state or political subdivision to transactions involving property, goods, services or information obtained through other means ;

(ii) does not apply a general law to collect laws at the same rate from such state or political subdivision in transactions involving property, goods, services or information acquired by other means, unless the rate is lower as part of the tax break. less than five years;

(iii) imposes the obligation to collect or pay taxes on another person or entity other than in connection with transactions involving property, goods, services or information obtained through other ways;

(iv) establish a classification of Internet access service providers or online service providers for the purpose of establishing a higher tax rate to be imposed on such providers above the rate a tax imposed on those who provide services similar to those provided by other means;

(B) any tax imposed by the state or political authority, if:

(i) only the ability to access the site and the computer server of the remote seller is considered as determining the tax collection activity of the seller in the country; or

(ii) the provider of Internet access or Internet services is considered as an agent of the remote seller for the purpose of determining tax collection duties only because:

(I) the display of information or content of the seller outside the computer server outside the state of the provider of Internet access or Internet services; or

(II) processing of orders from a non-state computer server of a provider of Internet access or Internet services.

15 The term “electronic commerce” is defined as “any transaction conducted on or through the Internet, including the sale, lease, license, gift, or transfer of property, goods, services, or information, or not for consideration. and includes providing internet access.”

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