4th Circuit rules provision of MD digital ad tax violates 1st Amendment

A provision of Maryland’s novel digital advertising tax is unconstitutional, the U.S. Court of Appeals for the 4th Circuit held Friday in delivering a win to the U.S. Chamber of Commerce and several trade associations whose members would be liable for the tax imposed by Maryland’s General Assembly.

In a published opinion authored by Judge Julius Richardson, a three-judge panel for the 4th Circuit ruled a “pass-through” provision of Maryland’s digital ad tax — which prohibits companies from directly passing the tax cost to customers by a separate fee, surcharge or line-item on invoices or telling customers how the tax affects pricing — is a content-based restriction on speech in violation of the First Amendment.

The ruling issued comes after a federal judge for the U.S. District Court for Maryland just last year dismissed the U.S. Chamber of Commerce’s case against Maryland, with Judge Lydia Kay Griggsby finding the provision restricted protected speech but has not been shown to be facially unconstitutional.

The U.S. Chamber of Commerce filed the lawsuit with several trade associations, claiming the “pass-through” provision of Maryland’s first-in-the-nation 2021 Digital Advertising Gross Revenues Tax Act violated the First Amendment.

“As much today as 250 years ago, criticizing the government — for taxes or anything else — is important discourse in a democratic society,” Richardson wrote. “The First Amendment forbids Maryland to suppress it.”

Under the law, digital advertising service providers are taxed on their annual gross revenues derived from digital advertising services provided in Maryland if the service provider has at least $100 million in global annual gross revenues. The tax rate is graduated and ranges from 2.5 to 10% based on the global annual revenues of the business.

The funds collected by Maryland are distributed to the state’s Blueprint for Maryland’s Future Fund, which pays for a package of public education system improvements in the state. According to the Maryland Office of the Comptroller, since 2022, Maryland has collected hundreds of millions in digital ad tax revenue.

Jennifer Dickey, vice president and deputy chief counsel of the U.S. Chamber of Commerce’s Litigation Center, said the 4th Circuit “got it right.”

“The pass-through provision of Maryland’s digital services tax is unconstitutional,” Dickey said in an email. “The U.S. Constitution protects businesses’ right to speak to their customers about taxes that affect their prices. [Friday’s] decision is also a victory for small businesses and entrepreneurs who depend on digital ads and platforms to advertise their services, and will now be able to understand how Maryland’s digital tax is affecting their costs.”

Brooke Lierman, Comptroller of Maryland, declined to comment Monday. A spokesperson for the Maryland Office of the Attorney General, whose office represented Lierman, also declined to comment.

Paul Taske, co-director of the NetChoice Litigation Center, said the 4th Circuit’s decision “was absolutely correct.”

“The government has no power to silence dissent in America. Maryland tried to prevent criticism of its tax scheme, and the Fourth Circuit recognized that tactic for what it was: censorship,” Taske said in an emailed statement.

NetChoice, one of the trade associations who alleged the “pass-through” provision violated the First Amendment, routinely advocates for free expression and free enterprise on the internet and is no stranger to lawsuits over state-level internet regulations.

The trade associations argued the provision forbids them to explain the tax to their customers and unlawfully restricts commercial speech. Lierman contended on appeal that the “pass-through” provision regulates conduct by prohibiting companies from directly passing on the cost of the tax imposed by the digital ad tax and only regulates speech that is integral to the conduct that the Digital Advertising Gross Revenues Tax Act prohibits.

In reversing and remanding the case back to the district court, the 4th Circuit ultimately determined the provision does not withstand heightened scrutiny.

“The states are free to make controversial policy … But with that freedom comes constraint,” Richardson wrote in closing. “States may not forbid regulated parties to talk about their regulations unless they withstand First Amendment scrutiny. Maryland’s pass-through provision does not.”

This story has been updated.