A new tax law in Maryland seemed ready to rattle every company that sold digital products in the U.S. But a court has now invalidated the Maryland Digital Advertising Tax.

Earlier this month, an Anne Arundel County Circuit Court judge blocked the digital advertising tax, which was set to be levied on companies making more than $100 million. The judge ruled that the tax violates the Internet Tax Freedom Act and the U.S. Constitution’s due process clause, Commerce Clause and First Amendment. Proponents promise an appeal.

Opponents, including Maryland Republicans, called the ruling a victory for small business. They also promised continuing legal challenges, as they have since the law’s inception.

News reports said another hearing in the case is scheduled for early in the year and that oral arguments are scheduled in a separate federal case about the law Nov. 29.

The legislation authorizing the tax was vetoed by Gov. Larry Hogan in 2020 and was enacted only after Annapolis lawmakers overrode the veto the following year.

Gives pause

The tax applies to the annual gross revenues of a business derived from digital advertising services in Maryland. Maryland does not tax nondigital advertising. The term “digital advertising services” is defined to include “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”

The term digital interface is defined as “any type of software, including a website, part of a website, or application, that a user is able to access.”

The tax is 2.5% to 10% of digital advertising services in Maryland, depending on annual gross revenues. Much of the money was earmarked for education.

“While the enactment of this law was well-intentioned, with revenue dedicated to funding the Blueprint for Maryland’s Future, its constitutionality – coupled with the tax’s residual impact on small businesses that utilize digital advertising services – continue to give me pause on the prudence of this law,” said state Comptroller Peter Franchot.

The Tax Foundation once called the Maryland law “incredibly vague” on vital definitions, creating uncertainty about where revenue is sourced and when it is subject to the tax. “Lawmakers have failed to take the complexity of digital advertising into account in structuring the proposed tax,” the Foundation added. 

Several states have toyed with a digital advertising tax like Maryland’s, including Montana, West Virginia, Nebraska, New York, South Dakota and the District of Columbia. Maryland’s law is the first such one in the U.S.

The legal fight seems far from over, but the concept has been thrown into serious doubt – for now.

If you think your business may be impacted by sales tax and you haven’t quite figured out how to manage your obligations,  contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.