Federal Judge Plans to Rule Soon in Md. Digital Ad Tax Case

Federal court review of the Maryland digital ad tax’s pass-through ban could soon be dismissed without prejudice. Expect a ruling “very promptly,” said U.S. District Court for Northern Maryland Judge Lydia Kay Griggsby at a virtual motions hearing Tuesday. Griggsby signaled she was inclined to rule the case moot due to a recent state court decision striking down the tax (see 2210240064). Maryland Attorney General Brian Frosh (D) appealed that ruling to the state’s Special Appeals Court, said a notice last week at the Circuit Court for Anne Arundel County (case C-02-CV-21-000509).

Griggsby raised concerns about mootness as she considered defendant Maryland and plaintiff U.S. Chamber of Commerce’s supplemental cross-motions for summary judgment. Maryland earlier argued there's significant state interest in precluding businesses from passing on the tax’s cost to consumers, but the chamber said the pass-through ban is unconstitutional (see 2208120053). At a July hearing, Griggsby said the state limits on how a company communicates prices to customers through a digital ad tax law sounds like restricting speech (see 2207130001). Griggsby ruled in March that the Tax Injunction Act (TIA) precluded federal courts from reviewing the tax itself (see 2203040060).

Griggsby asked if parties would rather the case be stayed or dismissed without prejudice. Either way, it would allow them to come back to federal court if the state court decision were reversed, she said. Maryland and the chamber chose dismissal. That would allow the Chamber to appeal a possible ruling on mootness and the court’s previous TIA ruling, said the plaintiff’s attorney, Michael Kimberly of McDermott Will. It would have to wait if the already 2-year-old case was stayed, he said.

"Stepping in on these issues when the state court is actively looking into them raises some concerns for this court,” said Griggsby earlier in the hearing: The judge isn’t convinced the Maryland appeals court couldn’t address the pass-through issue.

The federal case should continue because the state court ruled only that the tax was unconstitutional, Kimberly said. The state court’s ruling “says nothing whatever” about the pass-through prohibition, said the lawyer: It dismissed those counts, declining to address the merits. As a result, Kimberly said he “can’t understand how” the pass-through ban would be an issue in the state court appeal, he said. That’s a problem for businesses because if the state court’s decision is later reversed, companies will be held liable for what they should have paid, he said. Maryland’s law remains in effect and is chilling speech, he argued.

Griggsby doesn’t see how the prohibition could be enforced if the tax it relates to were struck down, she said late: “If there's no tax, not sure what we're directly ... passing through."

"Who gets taxed is a very, very significant concern for the state,” said Maryland Solicitor General Steven Sullivan, answering Griggsby’s question about how the ban satisfies a substantial public interest. The state has power to determine who pays a tax needed to generate revenue, the Maryland counsel said. Digital companies benefit greatly from doing business in Maryland “but have been largely untaxed,” he said. The ban ensures the wealthy companies pay rather than consumers who already pay many taxes, said Sullivan: The state could find no alternative way to accomplish that goal.

The Chamber disagrees that Maryland describes a substantial interest, said Kimberly. But even if the court disagrees, there are problems, he said. The pass-through ban doesn't itself raise funds and the ban doesn’t stop companies from raising customers’ prices to cover cost of tax, he said: All it does is stop them from communicating the state tax on bills as a line item.