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Maryland Declared the Digital Gross Revenues Tax not constitutional

On May 9, The Maryland State Supreme Court breathed new air into the sails of a state sales tax on digital advertising services. On that day, the court vacated a lower court’s ruling that the digital revenues tax is unconstitutional. Maryland is currently the only state that has enacted this type of tax. Other states will undoubtedly be following this litigation; however, hoping to capitalize some day on this untapped reservoir of tax revenue.

The “Digital Advertising Gross Revenues Tax” is a sales tax on digital advertising services derived in Maryland when those services are accessed through a device located in the state. By “device” the state is referencing anything electronic (e.g. cell phone, laptop, etc.). Revenue is attributed to the state using measurement tools such as “geolocation data”, “cookies”, “internet protocol”, and “any other comparable information.” The tax is levied on companies with global annual gross digital advertising revenue of at least $100,000,000. The tax rate starts at 2.5% and tops out at 10% when global annual gross revenue exceeds $15,000,000,000. Tracking this revenue and sourcing part of it to the “devices” located in Maryland presents some unique and daunting challenges.

The State Supreme Court sided with the Comptroller of Maryland and validated (if only temporarily) the tax. In the Circuit Court of Anne Arundel County’s “Final Declaratory Judgement,” issued on November 18, 2022, the lower court held that the tax violates the Supremacy Clause of the United States Constitution and the Internet Tax Freedom Act, the dormant Commerce Clause of the US Constitution, and the First Amendment to the US Constitution. Tuesday’s decision to vacate was based on the Supreme Court’s opinion that the lower Circuit Court lacked jurisdiction in the case. That is because the appellees (Comcast of California, Maryland, Pennsylvania, Virginia, and West Virginia) failed to exhaust all of their administrative remedies before proceeding to the Circuit Court level. This basically means Comcast needs to go back and pursue this matter through each step of the legal process. Any observer must conclude that Comcast will do exactly that, since there is so much at stake in Maryland, and in all the other interested states. S&R will keep you up to date with any additional movement on this landmark case.