• by Wendy Davis , January 12, 2024

A federal appellate court has revived business groups' challenge to a Maryland law that imposed a first-of-its-kind tax on digital ad sales.

The law, passed over the governor's veto in 2021, taxes 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.

The measure also includes a “pass-through” provision that prohibits companies from “directly” passing on the cost of taxes to purchasers of digital ads “by means of a separate fee, surcharge, or line-item.”

That provision doesn't prevent companies from passing along the cost of taxes by “indirectly,” by factoring taxes into the total price.

In a decision issued Wednesday, a three-judge panel of the 4th Circuit Court of Appeals allowed business organizations to proceed with a claim that the restriction on “directly” passing along taxes violates the First Amendment.

The panel wrote that a district court judge “should decide whether the pass-through provision restrains speech and, if so, whether it passes constitutional muster.”

The ruling comes in a federal lawsuit brought by the Chamber of Commerce and tech groups NetChoice and Computer & Communications Industry Association. Those groups raised several challenges to the state tax law, including that the pass-through restriction amounted to a content-based restriction on speech.

“There is no dispute that the pass-through provision permits payers of the exaction to add the entire amount of the exaction to their invoices, recovering 100% of it from their customers,” the groups wrote in papers filed with the 4th Circuit last year. “The only thing it forbids is the express identification of the amount as a 'separate fee, surcharge, or line-item.'”

A separate challenge to the law by Comcast and Verizon -- which sued in state court in Anne Arundel County -- was recently dismissed by the state supreme court.

Comcast and Verizon initially prevailed, with Anne Arundel Circuit County Judge Alison Asti ruling that the law violates the Internet Tax Freedom Act, and also represented an unconstitutional attempt to regulate interstate commerce. But state officials appealed to the Maryland Supreme Court, which vacated Asti's ruling for procedural reasons.

Ad organizations unsuccessfully urged the Maryland Supreme Court to uphold Asti's decision, arguing in a friend-of-the-court brief that the state tax impermissibly subjects digital ads to different treatment than non-digital ads.