Md. Supreme Court Sought to Avoid Opening Loophole in Ad Tax Case

The Maryland Supreme Court couldn't allow Comcast and Verizon to circumvent state legislative intent to resolve tax disputes through the administrative remedy process, Chief Justice Matthew Fader said Wednesday on the ISPs' challenge to the state's digital ad tax. The state’s high court released an opinion explaining its May 9 decision to overturn a Circuit Court for Anne Arundel County ruling that the tax is unconstitutional. The companies should have challenged the tax in the Maryland Tax Court, an expert administrative agency, before seeking judicial review, Fader said.

The Maryland Supreme Court’s May decision vacated the lower court’s March 14, 2022, order denying the state’s motion to dismiss, an Oct. 21 order partly granting the ISPs’ motion for summary judgment and denying the state’s motion, and the Nov. 18 final declaratory judgment. The state high court remanded the action to the circuit court with directions to dismiss and said it would explain its reasons later (see 2305100072).

Instead of pursuing statutory administrative remedies, Comcast and Verizon "filed a direct challenge by way of a declaratory judgment action in the circuit court,” Fader wrote in Wednesday’s opinion. “Absent exhaustion of the special statutory administrative remedies provided in the [Maryland] Tax-General Article, the circuit court lacked jurisdiction over the challenge and was required to dismiss it.” The court said "the administrative remedies in the Tax-General Article are exclusive” with respect to the ISPs' challenge of the digital ad tax, so a constitutional exception didn’t apply.

Maryland Tax-General Article Section 13-505 "broadly prohibits judicial action that would interfere with the assessment or collection of taxes," while Section 3-409 of the Courts and Judicial Proceedings Article "prohibits the use of declaratory judgment actions as an end-run around special statutory administrative remedies,” said Fader. "Together, they establish a legislative intent that the special statutory administrative remedies provided for the resolution of tax disputes are exclusive."

"A declaratory judgment that declares a tax unlawful, including the one sought by the Companies and entered by the circuit court here, necessarily runs afoul of [Section] 13-505," Fader said. "Although the Companies protest that the purpose of a declaratory judgment is not to ‘prevent the assessment or collection’ of a tax, but merely to afford a defense if the Comptroller initiates legal action against them, we see no daylight between those scenarios when it comes to compliance with the purpose underlying [Section] 13-505.” The only reason for Comcast and Verizon "to seek a declaratory judgment from the circuit court is the expectation that such a judgment would prevent the Comptroller from assessing or collecting the digital advertising tax from them.”

"Ultimately, to allow a declaratory judgment action to be pursued as an exception to the scope of [Section] 13-505 would permit an end-run around the legislative intent to resolve tax disputes through the special statutory administrative remedy process,” wrote Fader. “We cannot faithfully interpret the broad language and stated purpose of [Section] 13-505 to implicitly leave such a large loophole through the special statutory administrative remedy scheme the General Assembly has established.” Even if the section's broad language "could still be interpreted to leave open a window for a declaratory judgment action, Section 3-409(b) "shuts it tight" by saying if a law provides a special form of remedy, it must be followed, the chief justice added.

The reason for requiring exhaustion is to give an administrative agency the first chance to apply its expertise, said Fader: The court disagrees with the ISPs that a constitutional exception allowed them to skip ahead. That exception permits a court decision without administrative exhaustion if there’s a direct attack on the authority of the legislature to adopt legislation from which relief is sought, but this exception is quite narrow and subject to limitations, wrote Fader. "One such limitation, which is dispositive here, is that it does not apply when an administrative remedy is exclusive, as opposed to primary.”

Whether one decides to challenge a tax before or after it's paid, "a taxpayer’s right of appeal from a final determination or a final assessment of the Comptroller is to the Maryland Tax Court," said Fader. The tax court's final order is then subject to judicial review according to the state administrative procedure act. Extensive administrative remedies available "constitute persuasive evidence" that taxpayers should seek relief administratively before coming to the court, the chief justice said. The Maryland Supreme Court has long said the tax court is fully able to resolve constitutional issues and questions about a law's validity, noted the chief justice.

Comcast declined to comment Wednesday. Verizon didn't comment. Noting the tax's revenue will support education, Maryland Attorney General Anthony Brown (D) said he "will continue to defend challenges to this tax in support of Maryland’s transformative goal of leveling the playing field for underserved communities by providing access to those quality educational opportunities enjoyed by our highest performing schools.”

A separate challenge to the state tax is before the 4th U.S. Circuit Court of Appeals (case 22-2275). The U.S. Chamber of Commerce and Maryland filed briefs earlier this year (see 2303170019) and 2302240047). The 4th Circuit last month tentatively scheduled in-person oral argument during its Sept. 19-22 session in Richmond.