Report from the Reuters
In Brief – A three-judge panel of the Fourth Circuit of the US Court of Appeals has unanimously blocked a provision in Maryland’s landmark 2021 digital advertising services tax that barred companies from using a line-item on bills to inform customers of the impact of the tax. Trade groups led by the US Chamber of Commerce challenged the tax law on several grounds, including that it violated the federal Permanent Internet Tax Freedom Act (PITFA), the Commerce and Due Process Clauses of the Constitution, and that the provision prohibiting a separate line-item on customer bills violated the First Amendment. While the legal challenges to the tax regime itself were sent to the Maryland state court system, the First Amendment challenge has been in federal court. The latest ruling unanimously overruled a 2024 ruling by District Judge Lydia Kay Griggsby that allowed the provision to stand based on the authority of the state to impose taxes and the argument that commercial speech was less protected. The appeals court opinion said that the First Amendment “forbids” Maryland to suppress speech “criticizing the government – for taxes or anything else”. Griggsby was directed to determine appropriate remedies.
Context – Several US states have explored taxes that aim to replicate the foreign “digital services taxes” (DSTs) that increase taxes on digital giants like Google, Meta, and Amazon. Foreign country DSTs, which first emerged in Europe in 2020, have been strongly opposed by President Trump and are an issue in ongoing tariff and trade negotiations. On its face, Maryland’s law appears to violate PITFA because offline advertising is not taxed the same way as online ads, and federal and state judges have so ruled, but a morass of jurisdiction battles related to the proper legal venues for state tax challenges has tied up the litigation for years and it is currently in the Maryland Tax Court, a state tax administrative body. New York, California, Washington, Rhode Island and Minnesota have pursued their own types of digital taxes and backers are calling for a coordinated digital tax campaign by states to circumvent PITFA reminiscent of the online sales tax battle.