Federal Judge Won’t Review Md. Digital Ad Tax Pass-Through Ban

The U.S. Chamber of Commerce plans to challenge a federal court decision tossing businesses’ challenge to the Maryland digital ad tax’s pass-through ban, the Chamber said Monday. At oral argument last week, U.S. District Court for Northern Maryland Judge Lydia Kay Griggsby signaled she would dismiss without prejudice due to a state court striking down the tax as unconstitutional. In the Friday opinion, Griggsby also denied as moot Maryland’s motion to dismiss and plaintiff U.S. Chamber of Commerce’s motion for summary judgment.

“Plaintiffs’ First Amendment claim is mooted by the Circuit Court of Anne Arundel County’s decision finding the tax imposed by the Maryland Digital Advertising Gross Revenues Tax to be unconstitutional,” wrote Griggsby in case 1:21-cv-00410-LKG. The state court decision, which responded to a challenge by Comcast and Verizon, “vitiated” the Chamber’s need for federal court relief, she said. “Without a tax to impose, there is no ability for Plaintiffs to pass through this tax to their customers, either directly or indirectly.” Any federal court decision on the ban “would have no practical effect on the outcome of this case,” she said.

“We plan to appeal the court’s decision,” said Jennifer Dickey, associate chief counsel for the Chamber’s Commerce Litigation Center. “While we are gratified that a Maryland court has recognized the legal problems in Maryland’s Digital Advertising Tax Act, that decision remains on appeal. We still need relief from this illegal Act, which ultimately harms Maryland’s small businesses that rely upon digital advertising every day.” The Maryland attorney general’s office declined to comment.

Griggsby ruled in March that federal courts were precluded by the Tax Injunction Act (TIA) from reviewing the tax, though they could review the pass-through ban (see 2203040060). At last week’s argument, the judge raised concerns that a ruling on the ban might be moot due to the state court decision. Both sides told Griggsby they would prefer dismissal without prejudice to a stay. The Chamber's counsel told the judge that dismissal would allow it to appeal any forthcoming ruling on mootness and the court’s previous TIA ruling (see 2211290074).

With Maryland appealing the state court’s decision, the federal court “is disinclined to address this sensitive constitutional issue,” Griggsby said. “The Court is also satisfied that the First Amendment question presented in this case is not capable of repetition, such that it requires immediate resolution by the Court.” Since the state court struck down the tax, “there is no immediate risk that the Pass-Through Prohibition will be enforced against Plaintiffs and their members,” she said.

Griggsby realizes the state court’s decision could be reversed, she said. “Should that occur, the Court agrees with the parties that this dispute could become the subject of a justiciable controversy once again.” Dismissing the case without prejudice allows parties to bring the case back to federal court.

The state circuit court’s order said the tax violates the U.S. Constitution's supremacy clause and the Internet Tax Freedom Act because the tax is discriminatory; flouts the Constitution's Commerce clause because it discriminates against interstate commerce; and defies the First and 14th amendments “because it singles out the Plaintiffs for selective taxation and is not content-neutral.” The state appealed to the Maryland Special Appeals Court (case CSA-REG-1642-2022).