Md. Supreme Court will weigh constitutionality of digital advertising tax

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The Maryland Supreme Court will consider whether the state’s tax on digital advertising violates the U.S. Constitution’s prohibition on state interference with interstate commerce and discriminates against certain online companies while not taxing others.

The high court said Friday that it will hear the Maryland comptroller’s appeal of a judge’s ruling that the tax intended to fund upgrades to the state’s public schools essentially imposes a state regulation on interstate commerce, which is the constitutional province of Congress.

The justices will also review Anne Arundel County Circuit Judge Alison L. Asti’s ruling that the first-in-the-nation online tax 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.

In addition, the Maryland Supreme Court will examine Asti’s decision that the law 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.

In its successful petition for Supreme Court review, the Maryland Attorney General’s Office also asked the justices to consider whether those challenging the law — including internet providers Comcast and Verizon — had to exhaust their challenges through the administrative process before mounting their so-far-successful constitutional challenge in state court.

The Supreme Court will hear arguments in the appeal in May. The justices are expected to render their decision by Aug. 31 in the case, Comptroller of Maryland v. Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al., No. 32 September Term 2022.

Hanging in the balance is the fate of a tax its sponsors said could raise about $250 million annually to expand early childhood education, raise teacher salaries and help struggling schools.

The office of Senate President Bill Ferguson, D-Baltimore City and a chief sponsor of the tax law, did not immediately return requests for comment Monday on the court’s grant of review.

But on Jan. 13 Ferguson noted the law’s circuit court defeat and said, “I suspect that the attorney general’s office will continue to fight this vociferously because, frankly, I think multinational companies that make over $100 million a year in profit should contribute to the tax, to the infrastructure that makes Maryland a great place to live, work and play. But you know, we’ll see how that plays out.”

Senate Minority Leader Steve Hershey, R-Upper Shore, said Monday that “I’m just as confident now, as when we debated the bill, that this policy violates the First Amendment, the Internet Tax Freedom Act, and the dormant commerce clause.”

He added, “Maryland’s Supreme Court will provide the necessary check on Maryland’s Democratic supermajority who unapologetically finds no problem creating its own new, one-of-a-kind taxes…whether constitutional or not.”

Enforcement of the tax has been stayed pending its resolution by the Supreme Court.

In its successful petition for high court review, the attorney general’s office asked the justices as a threshold matter to consider whether those challenging the law — including internet providers Comcast and Verizon — had to exhaust their challenges through the administrative process before mounting their so-far-successful constitutional challenge in state court.

“The duty to exhaust administrative remedies in a tax dispute is not subject to a constitutional exception,” wrote the lead attorney, Assistant Attorney General Murray Singerman.

Singerman added that the tax does not violate the Constitution’s interstate commerce provision because it “taxes only activity within Maryland” and “applies equally to businesses whether headquartered in Maryland or elsewhere.”

The tax also does not violate the First Amendment, as it is imposed on advertisements regardless of “what messages are displayed via digital advertising, who a message (thus advertised) is attributed to, or how long any particular message is displayed, and even the general content of the message conveyed through digital advertising does not matter,” Singerman wrote.  “What matters is whether a taxpayer derived annual gross revenues…from digital advertising in the state of Maryland regardless of the content of the messages communicated via digital advertising.”

Singerman added that the federal Internet Tax Freedom Act contains no provision indicating that it preempts state tax laws.

Jeffrey A. Friedman, lead counsel for Comcast and Verizon, did not immediately respond Monday to messages seeking comment on the high court’s grant of the state’s review request. Friedman is with Eversheds Sutherland LLP in Washington.

Maryland’s Digital Advertising Gross Revenue Tax Act, enacted in 2021 over Republican Gov. Larry Hogan’s veto, has also faced a challenge in U.S. District Court in Baltimore from the U.S. Chamber of Commerce and groups representing online companies and advertisers.

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 issued her decision last October 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.

Asti rendered her ruling 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.

U.S. District Judge Lydia Kay Griggsby subsequently dismissed the federal court challenge in light of Asti’s decision that the law is unconstitutional but held open the possibility that the challenge could be refiled if Asti’s ruling is overturned on appeal.

The challenge in U.S. District Court in Baltimore was 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.