Source: RSM US LLP.   

TAX ALERT | February 03, 2023

Executive summary: Digital ad tax litigation to receive state supreme court review

On Feb. 12, 2021, the Maryland Senate joined the state House of Delegates in overriding Gov. Larry Hogan’s 2020 veto of House Bill 732, creating a first-in-the-nation digital advertising gross revenues tax on certain digital advertising revenue derived from Maryland. Litigation came swiftly after. Since that time, the tax has frequently appeared in the tax press and has paved the way for similar proposals in other states. The tax became effective in 2022 after a one-year delay, although it remains in litigation after a county court found the tax unconstitutional. The Maryland Supreme Court, the state’s highest court, has agreed to hear an appeal of that decision this spring.

Maryland digital advertising tax: Where are we now?

How the digital advertising tax works

The digital advertising gross revenues tax is imposed on persons with global annual gross revenues of at least $100,000,000 and deriving gross revenues from digital advertising in Maryland of at least $1,000,000. Tax rates vary from 2.5% to 10% depending on the taxpayer’s global annual gross revenue. ‘Digital advertising services’ are defined as advertisement services on a digital interface, e.g., software, websites, or applications, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising and comparable advertising services.

Subsequent amending legislation excluded broadcast and news media entities, essentially businesses primarily engaged in operating broadcast television or radio or in the business of newsgathering, reporting or publishing articles or commentary about news, events and other matters of public interest from the tax. That legislation also explicitly prohibited an entity subject to the tax from directly passing it through to a customer purchasing the digital advertising services through a separate fee, surcharge or line-item.

Finally, corresponding regulations were promulgated in December of 2021 providing some clarification on calculating revenue derived from digital advertising services in Maryland. Taxpayers subject to the digital advertising tax were required to file a declaration of estimated tax on or before April 15, 2022, and make quarterly estimated payments for 2022 revenues. The first annual return was scheduled for April 15, 2023.

The litigation and what’s next

The digital advertising tax has been controversial from its first proposal. Soon after the veto override, a complaint was filed in federal court requesting an injunction of the tax. The complaint alleged the digital ad tax was discriminatory under the Internet Tax Freedom Act and otherwise unconstitutional. The federal case was mostly dismissed due to the Tax Injunction Act barring a challenge when the state court could provide an adequate remedy. A provision challenging the prohibition on passing the tax through to customers was allowed to continue but was also ultimately dismissed in early December.

A similar complaint was filed in Maryland state court. In October, an Anne Arundel County judge found the tax to be unconstitutional. The order granting summary judgment for the taxpayers found the tax to violate the Internet Tax Freedom Act, interstate commerce under the Commerce Clause of the U.S. Constitution and the first and fourteenth amendments of the U.S. Constitution. The Maryland comptroller subsequently appealed the decision to the state supreme court (the state’s highest court), which agreed to hear the case on Jan. 20, 2023.

The state’s brief is currently due March 1, 2023, with oral arguments scheduled for May 5, 2023, although those dates are subject to change. Accordingly, the litigation is ongoing, and a stay of the county court’s order has not been granted as of the date of this article.


The Maryland digital ad tax will likely affect few taxpayers due to the required revenue thresholds. Yet the tax has generated much discussion in the business community. Some businesses fear that the tax will be passed on to customers in the form of higher advertising rates. Some businesses believe that high gross revenue thresholds will eventually be lowered to capture more advertisers.

At least 11 states have considered similar legislation in the past. Many observers believed that past proposals in other states were stalled because of the litigation in Maryland. Despite one unfavorable ruling and the continuing litigation, lawmakers in at least three other states have proposed digital advertising taxes.  Several proposals have been introduced in Massachusetts with various approaches to taxing digital advertising including a gross receipts tax, an excise tax and a study of taxing such activity. Legislators in Connecticut have also proposed a digital advertising gross receipts tax. Additionally, a recent New York proposal would impose a tax on digital advertising revenue on companies with global annual revenue at least $100 million.

Lawmakers in other states are waiting to see what becomes of the Maryland litigation. If Maryland should prevail, more states will likely propose and enact digital advertising taxes on gross revenue. Businesses that use digital advertising should be aware of these developments. Taxpayers impacted, or that could be impacted, by digital advertising taxes should contact their state and local tax advisers with questions.

This article was written by Brian Kirkell, David Brunori, Erica Cline, Mo Bell-Jacobs and originally appeared on 2023-02-02.
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