Md. Urges 4th Circuit to Dismiss Digital Ad Tax Case

The Tax Injunction Act (TIA) precludes federal courts from reviewing Maryland’s digital ad tax, the state said Thursday in a brief (docket 22-2275) at the 4th Circuit U.S. Court of Appeals. The 4th Circuit should dismiss entirely a U.S. Chamber of Commerce appeal from the U.S. District Court for Maryland, the state said. "Plaintiffs’ suit is the sort of action Congress sought to prevent when it enacted the TIA.”

The Chamber seeks to reverse the lower court’s March decision dismissing businesses’ challenge of the tax and its Dec. 2 dismissal of the chamber’s challenge to the tax’s pass-through ban. It argued last month with co-appellants NetChoice and the Computer & Communications Industry Association that the district court failed to exercise its jurisdiction (see 2301250023). They said the tax is punitive and thus not preempted from federal court review under the TIA, which bars federal district and appeals courts from reviewing state tax cases brought by taxpayers.

The 4th Circuit case goes on as the Maryland Supreme Court reviews the state’s appeal of a lower court's striking down the tax as unconstitutional. Maryland’s brief at the state high court is due March 1, with appellees Comcast and Verizon’s brief due March 31, said a Jan. 20 order.

"The TIA bars this entire suit, because the TIA deprives federal courts of jurisdiction over any action to enjoin, suspend, or restrain the assessment, levy, or collection of any state tax where the State’s laws provide a ‘plain, speedy and efficient remedy,’ Maryland told the 4th Circuit. “This Court has held that Maryland law provides such a remedy.” The preemption "applies to actions for declaratory and injunctive relief seeking to invalidate and enjoin collection of a tax.”

Plaintiffs’ argument the tax is actually a punitive fee “fails because digital advertising is a perfectly lawful activity under Maryland law,” the state said. The U.S. Supreme Court said in a 2021 decision (CIC Services v. IRS) that "a tax cannot be deemed a penalty merely because it taxes 'conduct that [is] legal but disfavored for tax purposes,'" said Maryland: The ruling defined a penalty as "punishment for an unlawful act or omission.”

The assessment satisfies a four-prong test for determining what is a tax from the 4th Circuit’s 2013 ruling in Liberty University v. Lew, said Maryland: (1) It produces revenue for the government; (2) liability for the tax doesn't depend on a "scienter requirement," which refers to intent or knowledge of wrongdoing; (3) the tax is collected through normal means; and (4) it lacks negative legal consequences beyond requiring payment to the taxing authority.

It also satisfies a three-prong test from the 4th Circuit's 2000 ruling in Valero Terrestrial v. Caffrey, said Maryland, though the state thinks that decision is outdated and shouldn’t be applied. It’s a tax under Valero because (1) the Maryland government imposes the charge, (2) it applies to more than one entity and (3) the revenue will benefit the public by funding educational improvements, said the state.

If the 4th Circuit decides TIA doesn't stop the court from reviewing the case, it should dismiss because “longstanding principles of federalism and comity counsel a hands-off approach to state tax administration,” said Maryland. “The district court acted well within its discretionary power to withhold injunctive and declaratory relief for prudential reasons, even in a case not constitutionally moot, after receiving notice” that a state court found Maryland’s tax law unconstitutional and that the state was seeking Maryland Supreme Court review, it said.

The 4th Circuit's usual practice is to refrain from addressing the merits when the district court didn't rule on them, noted Maryland: But if not, the appeals court should reject the constitutional challenge to a ban on passing on costs of the tax to consumers. The challenged ban restricts conduct, not speech, said Maryland. "If the prohibition affected speech at all it would be limited to an incidental effect on speech integral to the unlawful activity of directly passing on the cost of the digital ad tax to customers in violation of [Maryland] Tax-General § 7.5-102(c), which is not protected speech.”

"Applicable precedent renders it inappropriate to subject the direct pass-through prohibition to content-based restriction or political speech analysis,” added the state. Citing the 1980 SCOTUS case, Central Hudson Gas and Electric. v. New York Public Service Commission, Maryland argued the challenged ban would withstand intermediate scrutiny.