Fourth Circuit: Free speech claims against Maryland’s novel digital ad tax can move forward

First Amendment claims against a first-of-its-kind digital advertising tax in Maryland can move forward, a federal appeals court ruled Wednesday.

The opinion, from a panel of three judges at the Fourth Circuit Court of Appeals, concluded that a free speech challenge to the law by the Chamber of Commerce of the United States and other groups should be reconsidered by a lower federal court that earlier dismissed the claim.

However, the appeals court agreed that the lower court was correct to dismiss three other claims that challenged the lawfulness of the tax under the Internet Tax Freedom Act, Commerce Clause and Due Process Clause.

The law — the first of its kind in the nation — was enacted in 2021 over the veto of former Gov. Larry Hogan (R) and would impose a tiered tax on internet ad revenue in Maryland.

Companies reporting $100 million of gross global annual revenue would be subject to a 2.5% levy. Tax rates max out at 10% for companies reporting more than $15 billion in gross global revenue.

The tax would apply to large companies including Google, Facebook and Amazon; news organizations were exempted.

Legislative analysts projected that Maryland could collect $250 million annually in revenue from the bill.

The law prohibits the taxed companies from passing on the costs of the tax to their advertising customers “by means of a separate fee, surcharge, or line-item.”

The Chamber of Commerce — alongside the NetChoice and the Computer & Communications Industry Association — argued that the pass-through provision violates the First Amendment as a content-based regulation of speech.

The appellants also argued the act was designed to punish a select group of “massive technology companies” like Amazon, Facebook, and Google and was “unusual” and “punitive.”

The Maryland comptroller’s office argued that all of the claims were barred by the Tax Injunction Act, which generally prevents federal courts from stopping the collection of state taxes when state law provides an adequate remedy.

Fourth Circuit Senior Judge Henry F. Floyd concluded that the federal District Court had been correct in concluding that the First Amendment claims were not barred by the Tax Injunction Act and should be considered based on the free speech argument.

The claim was originally dismissed as moot after the Circuit Court for Anne Arundel County declared the act unconstitutional in an unrelated case, though it did not address the pass-through provision specifically. The Maryland Supreme Court later vacated the decision, saying the companies had not exhausted administrative remedies before filing a lawsuit.

The claims at the Fourth Circuit will now go back to the District Court, where a judge will decide whether the pass-through provision restrains speech and, if so, whether it passes constitutional muster.

The Fourth Circuit also ordered the District Court to change its dismissal of the challenges on other grounds to be entered “without prejudice,” which would allow the plaintiffs to litigate the claims in another venue, such as state court.

The comptroller’s office declined to comment Wednesday.

Maryland Attorney General Anthony Brown (D) said he “will continue to defend this transformative legislation and still believe[s] in the validity of this law.”

“The purpose of the digital ad tax is to provide critical funding to improve Maryland’s public education system and prepare our students to compete in the global marketplace. Youth across our State, including in our underserved communities, need access to vital educational opportunities,” Brown said in a statement. “The digital ad tax will provide Maryland the funding it needs to level the educational playing field across our State and ensure that all Maryland students receive a world-class education.”

This news article was written by Danielle E. Gaines for Maryland Matters, where it originally appeared. It is republished here via a Creative Commons license.