Report from Maryland Matters
In Brief – A federal district judge in Maryland has permanently blocked a provision in the state’s landmark 2021 digital advertising services tax that barred companies from using a line-item on customer bills to inform them of the tax and its impact. Trade groups quickly challenged the digital advertising services tax on several grounds, including that it violated the federal Permanent Internet Tax Freedom Act (PITFA), which prohibits state from imposing taxes on digital services that are not imposed on equivalent traditional businesses, and that the provision prohibiting a separate line-item on customer bills violated the First Amendment. While the legal challenges to the tax itself were eventually removed from federal court and sent to Maryland’s state courts, the First Amendment challenge remained in federal court. The latest ruling from Judge Lydia Kay Griggsby settles the question and permanently enjoins the section prohibiting the use of a line-item on bills for the tax.
Context – The Maryland digital advertising services tax was the first effort by a US state to replicate the foreign “digital services taxes” (DSTs) that aimed to increase corporate taxes imposed on digital giants like Google, Meta, and Amazon. Foreign DSTs, which first emerged in Europe in 2020, have been strongly opposed by President Trump and continue to be an issue in ongoing tariff and trade negotiations. Maryland was quickly sued after enacting its digital tax because it seems to clearly violate PITFA by not taxing offline advertising, such as on television, radio, billboards and print mailings, in the same manner as online advertising. Federal and state judges both ruled that way, but a morass of jurisdiction battles related to the proper legal venues for state tax law challenges has tied up the litigation for years and the PITFA challenge is now in the Maryland Tax Court, a state tax administrative body. States including Washington, New York, California, Rhode Island and Minnesota have since pursued their own types of digital taxes, and backers of state digital taxes are calling for a coordinated campaign to circumvent PITFA and increase taxes on digital services providers reminiscent of the online state sales tax campaign.