Federal judge dismisses First Amendment challenge to digital ad tax

The U.S. District Courthouse in Baltimore. Photo by Danielle E. Gaines.

A federal judge in Baltimore threw out a First Amendment challenge to the 2021 law that imposes a tax on internet ads in Maryland.

In a 20-page opinion , U.S. District Judge Lydia Kay Griggsby granted the state’s request to dismiss the case, writing that  plaintiffs in the case used “hypothetical invoices” to show how the law would be “unconstitutional as applied.” She added that “the record before the court, and the plain reading of the Pass-Through Prohibition, does not support plaintiffs’ argument.”

Griggsby wrote that the text of the law makes “clear that there are many applications of this statute that would be constitutional and would not implicate the First Amendment. At bottom, the statute’s unconstitutional applications do not substantially outweigh its constitutional ones. For this reason, Plaintiffs have not shown that they can prevail on their First Amendment facial challenge to the DATA’s [Digital Advertising Tax Act] Pass-Through Prohibition.”

Under the law’s pass-through provision, companies can adjust pricing to account for the tax. They cannot, however, do so with a fee or surcharge and cannot add a line item to invoices that accounts for the presence of the tax.

“We are disappointed with the decision, which recognized that Maryland is restricting the speech of businesses yet failed to hold the law unconstitutional,” said a statement from Jennifer Dickey, U.S. Chamber of Commerce Litigation Center vice president and deputy chief counsel. “The Constitution protects businesses’ right to speak to their customers about taxes that affect their prices.”

Dickey did not respond to questions about the potential for appealing the ruling to the 4th U.S. Circuit Court of Appeals in Richmond.

The ruling is the latest blow to large tech industries seeking to overturn the tax, which is the first of its kind in the country. Those same companies have at least four other cases working through tax court that lawyers say could overturn the law.

Sen. President Bill Ferguson (D-Baltimore City), who sponsored the legislation three years ago, applauded the ruling. He said in a statement that he was “pleased that the court upheld a constitutional and fair program that ensures digital advertising platforms contribute to the long-term success of Maryland’s children through our world-class education system.”

A spokesperson for Comptroller Brooke Lierman did not respond to a request for comment on the ruling.

In 2021, the Maryland General Assembly passed the digital ad tax that imposes a tiered tax on internet ad revenue in Maryland.

The state could collect as much as $250 million annually, according to legislative analysts. The funds are earmarked for the Blueprint for Maryland’s Future education program.

Then-Gov. Larry Hogan vetoed the measure but the legislature, with its Democratic supermajority, overrode the governor.

Under the law, companies reporting $100 million of gross global annual revenue are subject to a 2.5% levy. The tax increases in increments of 2.5% to a maximum rate of 10% levied against companies reporting more than $15 billion in gross global revenue.

Companies subject to the tax are prohibited from passing the tax on through a fee or surcharge. The so-called “pass through” language restrictions were one of four grounds forming the basis of the federal court challenge.

The U.S. Chamber of Commerce, NetChoice — a trade group representing large technology and social media companies — and the Computer & Communications Industry Association claimed the pass-through restriction amounted to a content-based speech restriction “that insulates lawmakers from responsibility for the act.”

In two separate 2022 rulings, Griggsby dismissed the four claims.

First, in March 2022, she dismissed the first three counts of the lawsuit including claims the law violated the Internet Tax Freedom Act, the Commerce clause and due process clause. Nine months later, Griggsby dismissed the First Amendment claim as moot.

In January, a federal appeals court judge upheld the March ruling but remanded the First Amendment claim back to the lower court for consideration.

The law has also been the subject of lawsuits in state court. An Anne Arundel Circuit Court judge ruled the law was unconstitutional but that ruling was later overturned by the Supreme Court of Maryland.

Meanwhile, big tech firms including Apple and Meta took their case to Maryland Tax Court to try to thwart the law. Those cases remain open.

On Wednesday, attorneys representing Google and Meta, in an online seminar with the California Tax Foundation, predicted Maryland courts would overturn the law as early as the fall because it violates the federal Internet Tax Freedom Act, according to Bloomberg Tax .

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