Judge Says Md. Digital Ad Tax Law’s Pass-Through Ban Affects Speech

Maryland limits on how a company communicates prices to customers through a digital ad tax law sounds like restricting speech, a federal judge said at a virtual argument Tuesday. After hearing arguments on remaining constitutional issues in U.S. Chamber of Commerce and others’ lawsuit against Maryland’s digital ad tax law (case 1:21-cv-00410-DKC), U.S. District Court in Baltimore Judge Lydia Griggsby said she disagreed the law regulates only conduct.

After ruling in March that the Tax Injunction Act precluded federal courts from reviewing the tax itself, Griggsby is weighing the constitutionality of Maryland's banning companies from passing the tax’s costs to consumers (see 2204290061). At Tuesday’s hearing, plaintiff U.S. Chamber of Commerce argued that the pass-through regulates speech, though Maryland said the pass-through regulates only conduct.

“I think we’re talking about speech here,” concluded Griggsby. But before ruling, the judge wants additional briefs on whether the plaintiff meets the burden for bringing a facial First Amendment challenge to the pass-through ban under 4th Circuit precedent, and on the state’s interest and why the prohibition satisfies intermediate scrutiny. Parties should propose a schedule by July 22 for further briefs, Griggsby ordered Wednesday.

If Maryland’s law generally restricted direct pass-throughs, it might be like other laws that regulate only conduct and which courts have upheld, said Griggsby. “Where the court is concerned is that this particular statute goes on and specifies … certain ways that you can’t directly pass on the tax.” The judge referred to the state law saying it can’t be passed on “by means of a separate fee, surcharge, or line-item.” That seems to control how a provider communicates and shares information to customers, said Griggsby: “That sounds like speech to the court.”

Parties agree the law allows businesses to recoup the tax’s cost, chamber attorney Michael Kimberly of McDermott Will said earlier in argument: “They just can’t say so.” That is regulating speech, he said. He said there's no set of circumstances in which the law can be applied, and the ban seeks to regulate political speech attributing rising prices to the lawmakers rather than companies.

The law doesn’t restrict speech, said Maryland Assistant Attorney General Stephen Sullivan: That written communications may be necessary to convey a charge doesn’t convert prohibited conduct into protected speech. It was appropriate for legislators to limit what is a violation by giving more explanation on what specifically companies can’t do, he said. States have an important interest in being clear about who's responsible for paying a tax and how much they should pay, said the Maryland attorney.

The chamber hasn’t met a standard for bringing a facial challenge under the 4th Circuit’s 2013 decision in Greater Baltimore Center for Pregnancy Concerns v. Mayor and City Council Baltimore, said Sullivan: That’s because the chamber didn’t provide facts on how real companies respond to the law and whether customers perceive it as making a political statement or “sticking” them with the cost. However, Kimberly said not only did Maryland never seek discovery, but it also expressly waived it.

Comcast and Verizon are separately challenging the law in the Maryland Circuit Court for Anne Arundel County. Motions for summary judgment are due Aug. 19, according to an April 20 order in case C-02-CV-21-000509. The state court scheduled a pretrial conference for Sept. 8 and a motions hearing Oct. 17.