• by Wendy Davis  @wendyndavis, April 4, 2023

Maryland's tax on digital ad sales is invalid under a federal law that prevents states from imposing taxes on online services without also taxing comparable non-digital services, the major ad organizations are telling the state's highest court.

“Maryland’s digital advertising tax is imposed on advertising services transacted over digital interfaces but not on non-digital advertising,” the trade groups Association of National Advertisers, American Advertising Federation, Interactive Advertising Bureau and American Association of Advertising Agencies write in a friend-of-the-court brief filed late last week with the Maryland Supreme Court.

The groups add that the Internet Tax Freedom Act prohibits states from singling out online services for taxes. 

The organizations are weighing in on a battle over a 2021 Maryland law that imposes taxes on companies with more than $100 million in digital ad revenue. Rates vary from 2.5% to 10% of revenue attributable to Maryland, with the percentage tied to global revenue.

Anne Arundel Circuit County Judge Alison Asti invalidated the law last October, ruling that it violates the Internet Tax Freedom Act, and also represents an unconstitutional attempt to regulate interstate commerce.

Asti's decision came in a lawsuit brought by Comcast and Verizon. (The Chamber of Commerce and others separately challenged the law in federal court; that matter was dismissed as moot last December, due to the state judge's ruling.)

Maryland officials are now appealing Asti's ruling to the state's Supreme Court.

The ad groups argue in their friend-of-the-court brief that Asti correctly ruled that the Maryland tax impermissibly subjects digital ads to different treatment than non-digital ads.

“Advertising is advertising, no matter in which media it occurs," the groups write.

“The format of digital advertising is not only similar to non-digital advertising services -- the two are often identical,” the groups add. “For example, a banner ad is simply a static, visual display of a commercially relevant message.”

The Chamber of Commerce and other business also urged the Maryland Supreme Court to invalidate the state tax law.

Those groups said in a separate friend-of-the-court brief that a decision to uphold the law could lead other states to impose similar taxes.

“Other states, including Connecticut, New York, West Virginia, Massachusetts, Nebraska, Montana, Texas, and Indiana are already considering social media and digital advertising taxes,” the business organizations write. “One particularly troubling risk, should the Act be upheld, is that similar laws in other states will pass, and technology companies will take their facilities out of the United States altogether, moving critical internet infrastructure offshore. The upshot would be substantial harm not only to Maryland’s and the nation’s economies, but to national security and the stability of domestic internet access.”

Judges on the state's highest court are expected to hear arguments next month.