Chamber of Commerce wages federal appeal of Md. digital ad tax

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A national business organization is pressing a federal appeal of Maryland’s tax on digital advertising while online advertisers have mounted a so-far successful challenge in state court.

The Chamber of Commerce, in papers filed in the 4^th U.S. Circuit Court of Appeals last week, said the law violates the advertisers’ constitutional right to free speech by permitting them to factor their tax cost into the bill they send customers but barring the companies from separating the tax out as a surcharge on the invoice.

The prohibition unconstitutionally prevents the companies from informing customers the reason for the higher price is the digital advertising tax, the chamber stated through its lead counsel.

“That is a simple content-based speech ban,” Michael B. Kimberly wrote.

“And the speech covered by the provision is political speech; if it were not banned, its purpose would be to assign responsibility for rising prices to the government, holding lawmakers accountable for misguided policies,” added Kimberly, of McDermott Will & Emery LLP in Washington. “A line item identifying a separate amount attributable to the act allows a company to communicate with its customers the reason for rising prices – it conveys that price increase is not the result of economic opportunism by the company, but the ill-conceived actions of elected officials.”

The Maryland attorney general’s office has until Feb. 23 to submit to the 4^th Circuit the state’s response to the chamber’s First Amendment argument.

The office defended the provision in U.S. District Court last year, saying the contents of an invoice are “commercial” speech, which the government has constitutional latitude to regulate.

The law’s ban on advertisers passing their digital tax cost on to customers via a separate surcharge enables the state to calculate easily the companies’ annual gross revenues, upon which their digital advertising tax bill is based, the attorney general’s office stated.

Advertisers are also free to inform customers of the companies’ tax liability outside of the invoice, the office added.

“(M)aryland’s statute does not prevent persons subject to the tax from conveying any information they might choose to communicate to a customer,” the office wrote. “So long as the taxpayer does not ‘directly pass on the cost of the tax imposed … to a customer … by means of a separate fee, surcharge, or line item,’ the statute places no limitations or constraints on what the taxpayer can communicate about the tax, whether it be stating the amount of digital ad tax or expressing any views the taxpayer might have about the tax.”

U.S. District Judge Lydia Kay Griggsby had declined to address the constitutional issue when she dismissed as moot the Chamber of Commerce’s challenge in December in light of Anne Arundel County Circuit Judge Alison L. Asti’s October decision that the law itself was unconstitutional. The Maryland Supreme Court will hear the state’s challenge to Asti’s ruling on May 5 and is expected to issue its decision by Aug. 31.

Kimberly stated in the chamber’s 4^th Circuit filing that Asti did not address the law’s surcharge prohibition provision, making it ripe for federal court review.

“Relying on mootness, the district court … concluded that it could not consider any element of this case,” Kimberly wrote. “But while appellants are happy to see that a Maryland state court has confirmed some of the act’s many legal flaws, that decision did not address the speech ban, which has ongoing importance to businesses that have already paid assessments under the act and must decide what they can communicate about cost increases.”

Maryland’s Digital Advertising Gross Revenue Tax Act was enacted in 2021 over Republican Gov. Larry Hogan’s veto. Sponsors of the measure said it could raise about $250 million annually to expand early childhood education, raise teacher salaries and help struggling schools.

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.

Internet providers 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 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 appeal of her ruling is docketed at the Maryland Supreme Court as Comptroller of Maryland v. Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al., No. 32 September Term 2022.

Griggsby, in dismissing the challenge, held open the possibility that it could be refiled if Asti’s ruling is overturned on appeal.

The case pending before the 4^th Circuit is Chamber of Commerce of the United States of America et al. v. Brooke E. Lierman, Comptroller of the Treasury of Maryland, No. 22-2275.