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State Supreme Court

Md. Digital Ad Tax Doesn't Violate ITFA or Constitution, Says AG

The federal Internet Tax Freedom Act (ITFA) doesn’t preempt states from taxing digital advertising, Maryland Attorney General Anthony Brown (D) argued Wednesday at the state’s highest court.

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But the Maryland Supreme Court needn’t reach such merits questions, said the state, because the tax law’s challengers Comcast and Verizon failed to exhaust all administrative remedies. "There are multiple reasons why plaintiffs’ claims should be dismissed on both jurisdictional grounds and the merits, but if their challenge somehow survived those obstacles, to prevail they would need to prove at least some facts to substantiate their claims,” wrote Brown.

The Maryland Supreme Court is reviewing a lower state court decision to strike down the digital ad tax as unconstitutional. The judge there ruled from the bench, with a subsequent written order providing little explanation. Meanwhile in federal court, the U.S. Chamber of Commerce asked the 4th U.S. Circuit Court of Appeals to reverse a district court’s decisions not to review the tax or a ban on passing through the tax’s costs to consumers. Maryland urged the 4th Circuit last week to dismiss that appeal (see 2302240047).

The digital ad tax law doesn’t violate the Constitution’s supremacy clause or ITFA, the state said in a brief (Case No. 32, September 2022 Term). Congress didn't establish a private right of action, either explicit or implied, to enforce the ITFA, said Maryland. Also, because ITFA’s tax moratorium “expressly attempts to regulate States’ ability to enact legislation, and does not purport to regulate individuals, the ITFA departs from the Constitution’s plan and cannot be deemed to preempt" Maryland's tax law, it said.

The digital ad tax isn't discriminatory because the state isn't taxing seller-purchaser transactions but rather annual gross revenue, Maryland added. "Absent proof that nondigital advertising services are ‘similar’ to digital advertising, there is no proof of discrimination within the meaning of the ITFA.” Digital ad services “materially differ” from other advertising services, it claimed. Also, Maryland said it’s not imposing a tax on the same electronic commerce subject to a tax by another state, which would be barred by ITFA. Maryland's tax isn't a “multiple tax” because it doesn't duplicate other states' taxes and because it assesses only Maryland digital ad revenue, it said.

The tax doesn’t violate the dormant commerce clause, Maryland said. Plaintiffs don't dispute that they do substantial business in the state, it said. The tax is fairly apportioned because the tax applies only to revenue from ads within Maryland, the state said. "The taxing formula established in regulation ensures that a taxpayer is taxed only in proportion to activity in Maryland.” Also, the law doesn't discriminate against interstate commerce and is fairly related to services provided by the state, it said.

Maryland disagreed with Comcast that it may not use a company’s global revenue to determine how much to tax in Maryland. “The Act taxes in-state revenue, which is within the jurisdiction of Maryland,” the state stressed. “When Maryland levies taxes within its authority employing a tax rate based on non-taxable elements, there is no transgression of any limitation imposed by the Constitution.”

Neither the tax law nor its pass-through ban runs afoul of the First Amendment, Maryland said. The state disagreed the law impermissibly targets plaintiffs and other companies that aren't broadcasters or news media, which were exempted from paying the tax. Plaintiffs fail to satisfy the Maryland Supreme Court's test in 2021's Clear Channel v. Director, Department of Finance of Baltimore City because they didn't show the challenged law singles out the press, targets a small group of speakers or discriminates on the basis of taxpayer speech, the appellant said.

Not allowing companies to include the tax as a separate fee, surcharge or line item on bills doesn't “restrict speech and regulates only the conduct of directly charging the digital ad tax to customers,” Maryland said. "Nothing in the Act purports to restrict what a taxpayer may say to the customer, or anyone else, about the tax or any other subject.”

The Maryland Supreme Court need not rule on those substantive questions "unless it concludes that some exception authorized the circuit court to adjudicate the merits,” wrote the appellant: The lower court shouldn't have ruled on the merits because the complainants failed to exhaust administrative remedies. “The circuit court erroneously relied on the so-called 'constitutional exception' ... which the appellate court has held to be unavailable in litigation challenging Maryland state taxes.”

The circuit court’s terse bench ruling on this question offered little analysis, though the court did acknowledge that it could cite no tax cases to support its exercise of jurisdiction,” said Maryland. State legislators made Maryland tax law's comprehensive remedial scheme the exclusive means for contesting a tax,” it said. Maryland Tax-General Section 13-505 prohibits court challenges to tax assessment or collection, the state said, and neither the circuit court nor plaintiffs gave a valid reason why that wouldn't apply to this case: "The circuit court’s ruling did not address or even acknowledge [Section] 13-505.”

Comcast’s argument that a “constitutional exception” applies is “based solely on tax cases decided before the statutory prohibition against judicial interference in tax assessment and collection was extended to all taxes within the Tax-General Article and the jurisdiction of the Tax Court was simultaneously expanded to encompass all taxes" in 1989, said the appellant: Another argument that there should be an exception because the tax court can't provide a remedy before the tax is assessed "essentially tries to capitalize on the non-ripeness of plaintiffs’ claims.”