Md. Cites Significant State Interest for Digital Ad Tax

Funding public education was the “main motivation” for a Maryland digital ad tax and a ban on passing on the cost to consumers, the state said in a supplemental brief Friday at the U.S. District Court in Baltimore (case 1:21-cv-00410-LKG). “But in addressing this funding need, the legislature sought to achieve other objectives,” including “greater equity and fairness in taxation and the modernization of Maryland tax laws, not only to adapt to changes in the State’s economy but also to encourage taxed entities to change for the better.” The pass-through ban ensures the digital ad service providers pay the tax that will fund public education improvements, the state said. Judge Lydia Griggsby said at oral argument earlier this month the ban implicates speech but sought more briefs on state interest and other questions (see 2207130001). The U.S. Chamber of Commerce sees “no evidence of any substantial interest served by the pass-through prohibition, nor is there evidence that the pass-through prohibition is appropriately tailored to any such interest,” the plaintiff said in its brief. The chamber urged facial invalidation of the pass-through prohibition that it said is a “a content-based ban on speech” or, at minimum, “unconstitutionally overbroad.” Maryland disagreed it’s unconstitutional. “Directly imposing a charge by billing it constitutes commercial conduct that may be regulated, and even punished criminally, without implicating the First Amendment.” The law constrains a taxpayer’s speech only if it's integral to “the unlawful conduct of direct pass-through,” said the state: It wouldn’t "prevent a taxpayer from including on an invoice whatever message it wished to convey about the digital ad tax, including the amount of the taxpayer’s annual digital ad gross revenue tax estimated to be attributable to the invoiced transaction, or, indeed, any other subject.”