Judge Weighs Whether Md. Sought to Punish Big Tech With Digital Ad Tax

A federal judge mulled Thursday whether Maryland’s digital ad tax is in fact a penalty on big tech. At virtual oral argument, U.S. District Judge Lydia Kay Griggsby in Baltimore weighed jurisdictional issues on the challenge by U.S. Chamber of Commerce, NetChoice Internet Association and Computer & Communications Industry Association (CCIA) (case 21-cv-00410).

Maryland asked to dismiss the case, arguing the Tax Injunction Act (TIA) bars businesses’ challenge of a state tax (see 2112130053). The 1948 tax law says federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy, and efficient remedy may be had in the courts of such State.” Maryland says the exception for lacking an efficient remedy doesn’t apply. The Chamber argues the case is ripe and the court should treat the Maryland assessment as a penalty, not a tax.

Griggsby focused on the threshold jurisdiction issue, with questions on whether it’s a tax or penalty and if there's a plain, speedy and efficient remedy. On the first issue, the judge pressed Maryland to explain how it’s a tax under a three-part test under 4th U.S. Circuit of Appeals precedent in the 2000 decision in Valero v. Caffrey. The Valero test considers who imposed the charge, who's subject to it and how the revenue will be used.

It's a revenue-generating measure by a legislative body that benefits the community, with revenue going to a fund meant to transform public education, argued Julia Doyle Bernhardt, counsel for the Maryland attorney general’s office: No factor of the Valero test weighs in favor of calling it a regulatory fee, she said. The tax could generate $250 million in revenue for public education, she stressed. Just because the tax is high doesn’t make it a penalty, Bernhardt responded to another question.

“It is an extraordinarily burdensome and high rate of taxation,” insisted plaintiffs’ attorney Michael Kimberly of McDermott Will. The tax fails the Valero test because its main purpose is punitive, and it narrowly targets big tech companies with its revenue threshold, he said. “There are only about 200 companies anywhere in the world that have $15 billion of gross annual revenue,” and “most have nothing to do with digital advertising.” The affected companies are targeted “not because of the economic activity that they’re engaged in, but because they have engaged with what lawmakers have identified as wrongful conduct worthy of disapproval,” Kimberly said. That's evident in legislator comments before the bill passed, which cast aspersions on Google, Amazon and Facebook, he said.

Legislators’ follow-up amendment to the tax exempting news media and prohibiting passing through costs to consumers further shows they meant it to be a big tech penalty, Kimberly said. If it was just about funding public education, it doesn’t make sense to carve anyone out, he said: “There is no conceivable explanation for a pass-through prohibition except to ensure that particular companies are made to pay.”

Griggsby earlier asked Maryland why legislators’ comments about the tax's purpose don’t “weigh in favor of finding this particular assessment to be a penalty as opposed to a tax.” No need to go back to legislator comments to interpret an unambiguous statute, responded Bernhardt: nothing in the law’s plain language indicates it's punitive. Griggsby later noted she couldn’t find anything in the statute saying the tax is to attack tech companies. Kimberly agreed it’s not in the law but said courts often do look at legislative history.

Maryland didn’t provide an efficient remedy because many companies would likely have to file challenges in state court, where cases can take five to seven years, said Kimberly. Also, Kimberly said it’s not rational to make companies break the law so they can bring a challenge. Griggsby appeared skeptical about multiple cases being a problem, saying one decision on a constitutional issue would cover all challengers.

The tax law gives a plain remedy and most cases can be completed within a year, at least in the initial state court, said Maryland AG counsel Brian Oliner. If a company genuinely believes the tax doesn’t apply to them, it would be tough for Maryland to make a criminal case against them since intent must be shown, he said. Any interest or penalties accrued while in a civil case can be abated, he said.

“While it is not unlawful to raise taxes, punitively targeting out-of-state businesses is,” said CCIA President Matt Schruers in a Thursday statement. “Digital advertising is a cost-effective way for small businesses to reach new customers, particularly valuable during the public health crisis.”