Chamber of Commerce and Industry Groups Sue Maryland Over First-Of-Its-Kind Digital Ad Tax

About one week after Maryland legislature voted to override the Governor’s digital ad tax veto, approving the first-of-its-kind measure, the Chamber of Commerce and several industry groups, including the Internet Association, NetChoice, and Computer & Communications Industry Association filed a complaint on Thursday in the District of Maryland against Peter Franchot in his official capacity as Comptroller of the Treasury of Maryland over the constitutionality of this legislation. All three of the groups include Google, Facebook, and Amazon in their membership.

The legislation imposes a digital advertising gross revenue tax, specifically targeting digital advertising services, “on annual gross revenues of a person derived from digital advertising in” Maryland. The bill has tax rates of 2.5%, 5%, 7.5%, and 10% depending on the amount of annual gross revenues, with $1 million as the minimum in the state to qualify for the tax. The tax funds will go towards the Blueprint for Maryland’s Future Fund, which provides school funding. The bill purportedly arose out of lawmakers’ claims that “many digital companies are undertaxed or are not paying their fair share of taxes.”

The plaintiffs argued that the Act is “a punitive assault on digital, but not print, advertising. It is illegal in myriad ways and should be declared unlawful and enjoined.” The plaintiffs contended that the tax targets big tech, specifically Google, Facebook, and Amazon. The plaintiffs averred that the “premise of the law is deeply flawed” because “(t)axing digital advertising revenue will have the opposite of the Act’s intended effect, reducing resources to support the creation and availability of high-quality ad-supported content, leaving the online field overrun by low-quality ‘junk’ content.” Moreover, the Act will allegedly “raise costs for consumers and make it more difficult for businesses to connect with potential customers.” As a result, the plaintiffs argued that the Act will harm people in Maryland and businesses. Furthermore, the plaintiffs pointed to the fact that Maryland Governor Larry Hogan vetoed the bill, purportedly calling it “misguided” and “unconscionable.”

The plaintiffs asserted that while the Act is portrayed and “styled as a tax,” it has numerous features that “confirm its punitive character,” such as “its (‘burdensome’) severity (up to 10% of gross revenues), its focus on extraterritorial conduct, the segregation of its proceeds from the State’s general fund, and the legislative history leading to its enactment,” and that the tax should not be passed on to consumers.

Accordingly, the plaintiffs argued that the Act is unlawful because it is preempted by the Internet Tax Freedom Act and it violates the Due Process Clause and the Commerce Clause of the U.S. Constitution.

The plaintiffs have sought declaratory, injunctive, and other relief. All plaintiffs are represented by McDermott Will & Emery LLP and the Chamber of Commerce is also represented by its own counsel.