Federal Challenge to Md. Digital Ad Tax Mostly Dismissed

A federal court said it’s precluded by the Tax Injunction Act (TIA) from reviewing Maryland’s digital ad tax. But U.S. District Court in Baltimore may review a challenge to an amendment to the Maryland Digital Ad Tax Act (Data) that prohibited companies from passing the tax’s cost onto consumers, said Judge Lydia Griggsby in a Friday order in case 21-cv-00410-LKG. Plaintiffs indicated they will fight on.

Griggsby partly granted and partly denied Maryland’s motion to dismiss the complaint by the U.S. Chamber of Commerce, NetChoice and the Computer & Communications Industry Association. The judge ordered parties to file a joint status report by April 4 on how each side thinks the case should proceed and on what schedule. Comcast and Verizon are challenging the law in the Maryland Circuit Court for Anne Arundel County (see 2112130053).

“The TIA bars plaintiffs’ challenge to the charge imposed by the DATA, because this charge is a tax and Maryland law provides a plain, speedy and efficient remedy for plaintiffs to challenge this tax in state court,” wrote Griggsby. But the TIA doesn’t “preclude plaintiffs’ challenge to the DATA’s pass-through prohibition provision, because this provision does not involve the ‘assessment, levy or collection’ of a tax.” Griggsby focused on jurisdictional issues at oral argument last month (see 2202180001).

“While we’re disappointed the court accepted Maryland’s pretextual argument that its crippling digital ads fee is a ‘tax,’ we’re ready to continue our challenge against the law’s other unconstitutional parts in federal court,” said NetChoice Vice President Carl Szabo in a statement. CCIA President Matt Schruers said “discriminatory taxes such as Maryland’s are unlawful and will ultimately hurt Maryland businesses and residents.”

Challengers had claimed the tax was really a penalty that could be challenged. Griggsby applied a three-part test under 4th U.S. Circuit of Appeals precedent in the 2000 decision in Valero v. Caffrey. The Valero test’s three prongs -- considering who imposed the charge, who's subject to it and how the revenue will be used -- weigh in favor of the charge being a tax, she said. Since revenue will be used for education, “the purpose served by funds collected pursuant to the DATA will promote the general welfare and benefit the general population.” Griggsby disagreed with industry that the pass-through provision makes the charge a penalty.

The judge disagreed with plaintiffs that state remedies for challenging the tax are inefficient. “Plaintiffs first argue that Maryland law does not provide for meaningful pre-deprivation remedy in this case, because their members will be forced to pursue this remedy at the risk of incurring penalties and interest, and possible criminal liability,” she said, but “Maryland law provides for a post-deprivation remedy that would not pose such risks.”

Plaintiffs’ concern that it’s inefficient for their many members to separately file suits “has more to do with how their members may choose to litigate this case, rather than any inefficiencies under Maryland law,” said Griggsby: State law lets one taxpayer challenge and have the determination apply to other challenges. Maryland Attorney General Brian Frosh (D) and the Chamber declined to comment.