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Judge strikes down Md.’s digital advertising tax as unconstitutional

Maryland’s digital advertising tax, which was struck down Monday by an Anne Arundel County judge, was designed to apply only to large digital companies like Google and Facebook. (AP Photo/Jeff Chiu, File)

An Anne Arundel County Circuit Court judge struck down Maryland’s tax on digital advertising Monday, saying it violates the U.S. Constitution’s prohibition on state interference with interstate commerce and discriminates against certain online companies while not taxing others.

Judge Alison L. Asti said the first-in-the-nation tax essentially imposes a state regulation on interstate commerce, which is the constitutional province of Congress.

The law also violates the federal Internet Tax Freedom Act’s prohibition on discriminatory taxes on online services insofar as Maryland does not similarly tax non-digital advertising, Asti said.

In addition, the tax violates the First Amendment because it is not viewpoint neutral. The tax applies to companies like Facebook, Google and Amazon, while exempting the online sites of news organizations.

Asti issued her decision in granting summary judgment for Verizon and Comcast, which had challenged the statutory tax on digital ads as unconstitutional and in violation of federal law.

The office of Maryland Comptroller Peter Franchot stated Monday that it is “reviewing the decision and deciding next steps,” which could include an appeal.

Asti’s decision is a blow to the law’s sponsors, who said the tax would raise about $250 million annually to expand early childhood education, raise teacher salaries and help struggling schools.

“As a case of first impression, we always knew this issue would face a legal journey,” Senate President Bill Ferguson, D-Baltimore City and the measure’s chief sponsor, said in a statement.

“We are confident that the attorney general will prevail in state courts on appeal,” Ferguson added. “Maryland’s children deserve a world-class 21st century education system that works for them and that’s funded appropriately. That’s what this law is all about.”

The Senate’s Republican leaders hailed Asti’s ruling.

“Today’s decision by the Anne Arundel County Circuit Court striking down the new digital ad tax is a huge win for Maryland’s small businesses who rely on affordable digital advertising to market their services,” stated Senate Minority Leader Bryan W. Simonaire, of Anne Arundel County, and Minority Whip Justin Ready, of Carroll County. “This is a refreshing check on Maryland’s Democratic supermajority who has no problem creating new, one-of-a-kind taxes that violate the First Amendment and tax Maryland’s job creators out of business.”

The statute, enacted last year over Republican Gov. Larry Hogan’s veto, is also facing a challenge in U.S. District Court in Baltimore from the U.S. Chamber of Commerce and groups representing online companies and advertisers.

The Maryland Attorney General’s Office, which has defended the law in state and federal court, has called the tax a legitimate and necessary revenue-raising measure for the state’s education system.

But companies opposing the tax in federal court have called it “a punitive assault on digital, but not print, advertising” by legislators bent on punishing large digital advertising companies they perceive as providing an online forum for misinformation and hate speech.

Counsel for the telecom companies challenging the Maryland law did not immediately respond Monday to messages seeking comment on Asti’s decision.

Comcast and Verizon are represented by Jeffrey A. Friedman, Daniel H. Schlueter, Charles C. Kearns and Charles C. Capouet of Eversheds Sutherland LLP in Washington.

Asti’s ruling was first reported by Law360.

The law would tax revenue the affected companies make on digital advertisements shown in Maryland. The tax rate would be 2.5% for businesses with gross annual revenue of $100 million; 5% for companies with revenue of $1 billion or more; 7.5% for companies with revenue of $5 billion or more and 10% for companies with revenue of $15 billion or more.

Comcast and Verizon filed their state court challenge in April 2021, just two months after the law’s enactment. The federal court challenge was filed just six days after enactment.

Asti rendered her decision in Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, No. C-02-CV-21-000509.

The pending U.S. District Court challenge is docketed as Chamber of Commerce of  the United States of America v. Peter Franchot, Comptroller of the Treasury of Maryland, No. 21-cv-410-LKG.

Oral arguments on the parties’ motions for summary judgment in that case are scheduled for Nov. 29.

The lead counsel for the challengers in federal court is Michael B. Kimberly of McDermott Will & Emery LLP in Washington.