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Judge Strikes Down Maryland Digital Ad Tax

Posted on Oct. 18, 2022

After a spirited motions hearing, a Maryland circuit court judge struck down the state's tax on digital advertising services.

Anne Arundel County Circuit Court Judge Alison Asti held during an October 17 motions hearing in Comcast v. Comptroller that the state’s tax violates the Internet Tax Freedom Act, the federal commerce clause, and the First Amendment. Asti said that she was ruling from the bench in the interest of time and brevity and asked plaintiffs’ counsel to submit a more specific proposed order by October 21.

Asti concluded that digital advertising is similar to traditional advertising, finding that the tax was discriminatory under the ITFA. She also held that the tax violates the commerce clause, taking particular issue with the rate being calculated on worldwide income on all sales, not just advertising.

The Maryland attorney general's office said it is reviewing the decision to determine next steps. Attorneys for Comcast and Verizon declined to comment.

The state’s digital advertising services tax uses an apportionment fraction based on global annual gross revenues at rates ranging from 2.5 to 10 percent, and it applies to companies with global annual gross revenues of at least $100 million.

S.B. 787, which became law without the governor’s signature, prohibits companies from directly passing on the cost of the tax to a customer through a separate fee, surcharge, or line item; exempts broadcast and news media entities from the tax; and delayed the effective date of the tax until tax years beginning after December 31, 2021.

Comcast and Verizon filed suit, arguing in a September 2021 amended complaint that the digital advertising tax violates the federal commerce clause, the federal and state due process clauses, and the ITFA.

In March Asti denied the comptroller’s motion to dismiss on all but one count, holding that the companies could proceed with the challenge without exhausting their administrative remedies, but she dismissed the allegation that the General Assembly improperly delegated its authority to the comptroller regarding calculating the tax.

The companies argued in an April 5 memorandum in support of a motion for summary judgment that the application of the tax leads to a discriminatory effect on interstate commerce and violates the commerce clause by targeting out-of-state companies to the exclusion of local in-state businesses.

The comptroller countered in his April 29 opposition to the motion for summary judgment that the companies had not shown that the tax violates the ITFA, the commerce clause, or the First Amendment.

Motions Hearing

Noting comments Asti made in the March 14 hearing on the motion to dismiss, Brian Oliner, arguing on behalf of the comptroller, moved for the judge to recuse herself because it seemed that she had already concluded there were no factual matters to be explored in the case.

But Jeffrey Friedman of Eversheds Sutherland (US) LLP, representing Comcast and Verizon, said that those comments were regarding the question of the scope of the constitutional exception for exhausting administrative remedies. Friedman said the state argued that the exception only applied to technical concerns with the process, with Asti agreeing with the plaintiffs that the exception was much more significant.

Asti denied the motion to recuse, saying that she had found no factual disputes pertaining to that motion.

Oliner argued that the plaintiffs’ motion for summary judgment should be denied, stating that the court did not have jurisdiction because the constitutional exception did not apply given that the administrative remedies are available and exclusive.

He contended that there were substantial facts the plaintiffs needed to show to prove their case that had not been stipulated or presented to the court, making the case not suitable for summary judgment. Asked to provide examples of facts the plaintiffs needed to present, Oliner said that the companies needed to show that digital advertising services are the same or similar to traditional advertising services to establish that the state’s tax was discriminatory in violation of the ITFA.

Oliner argued that digital advertising is not similar to traditional advertising, noting the ability to collect data on people seeing the ads.

But Asti questioned whether the whole purpose of the ITFA would be defeated if services on the internet could never be the same as services not on the internet, and whether the ITFA says services can’t be treated differently simply because the internet may provide more features for the same advertising.

Oliner argued that a trial was needed for facts to be presented on whether digital advertising and traditional advertising were similar, but Asti asked why she couldn’t take judicial notice if it was obvious that two services were similar.

Oliner also stated that the companies could not show that the tax violates the dormant commerce clause by targeting out-of-state companies because one of the plaintiffs in the case, Comcast of Maryland LP, is a domestic company whose income is earned in Maryland.

Friedman argued that no factual development was needed for Asti to rule in the case, stating that the tax singles out companies for harsh treatment in several different ways, in violation of the ITFA, the dormant commerce clause, and the First Amendment.

Friedman asserted that the tax violates the ITFA because digital advertising is similar to traditional advertising, which is not subject to the tax. He noted deposition testimony by a person with many years in the industry that both types of advertising generally have the same goal, have the same creator, and target similar audiences. He added that data is also collected with traditional advertising, with special phone numbers and mailing addresses sometimes used to determine who is engaging with the ads.

Friedman contended that even if digital advertising was not similar to traditional advertising, the tax would still violate the ITFA because there is no same or similar service being taxed by the state.

Friedman also argued that the tax violates the commerce clause by targeting big, out-of-state companies, noting comments from legislators. He said the mere fact that both Verizon and Comcast have many subsidiaries, including one that operates only in Maryland, did not change the fact that the tax was aimed at large interstate companies.

Friedman took issue with the way the rate was calculated, noting that the rate was based on worldwide income of all sales, not just advertising. He asserted that the tax was discriminatory in both its purpose and its effect.

Contending that the tax violated the First Amendment by providing an exemption for news media entities, Friedman said this requires a definition of news and requires the state to analyze the content of the entity, determine whether the entity provides news, and decide whether providing news is the entity’s primary purpose. He added that requiring this analysis of taxpayers’ speech violates the First Amendment.

Oliner noted that all inferences at the motion for summary judgment must be made in favor of the non-moving party, adding that statutes enjoy a strong presumption of constitutionality. He argued that the ITFA did not prohibit the taxation of services unique to the internet, stating that Congress could have specified such a prohibition in the act’s language if that is what it intended.

Oliner also argued that the ITFA would run afoul of the anti-commandeering doctrine of the 10th Amendment based on Murphy v. National Collegiate Athletic Association if the act was read to prohibit states from taxing e-commerce.

But Asti denied the state’s motion for summary judgment, concluding that it was substantially similar to its motion to dismiss, which she had already denied, and granted the plaintiff’s motion for summary judgment.

Asti agreed with the plaintiffs that there were no relevant facts in dispute and the product or service at issue in this case was advertising, and “advertising is advertising.” Because traditional advertising is not taxed in the state, Asti ruled, the tax on digital advertising was discriminatory under the ITFA.

She also concluded that the tax violates the commerce clause, finding that it targets specific companies and pointing out the way the rate of the tax is calculated in this case.

Noting that Oliner had stated that the entire tax would not need to be struck down if a First Amendment violation was determined, because the provisions at issue were subsequently added to the tax by an amendment, Asti concluded that the act was unconstitutional as currently written.

In March a federal district judge ruled in Chamber of Commerce of the United States of America v. Franchot that the Tax Injunction Act bars four trade associations from mounting a federal challenge to the tax itself but allows the associations to proceed in federal court with their challenge that the provision prohibiting companies from directly passing on the cost of the tax to a customer through a separate fee, surcharge, or line item violates the First Amendment.

The plaintiffs in Comcast v. Comptroller (No. C-02-cv-21-000509) are represented by attorneys with Eversheds Sutherland (US) LLP.

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