Maryland seeks dismissal of case challenging first-of-a-kind digital ad tax

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A lawsuit seeking to block Maryland’s first-of-its-kind tax on social media digital advertising revenue should be dismissed, the Maryland attorney general’s office argued in a court filing this week.

Tech lobbyists and the U.S. Chamber of Commerce filed the lawsuit in February, days after the new tax was enacted by a veto override vote in the General Assembly.

The groups argue that the tax is “a punitive assault” on digital advertising and violates the U.S. Internet Tax Freedom Act as well as the commerce and due process clauses of the U.S. Constitution.

In a motion to dismiss filed late Tuesday, the state rejects all of their claims, and argues that the case should be brought in Maryland Tax Court.

Additionally, regulations to implement the law have not yet been released from the state comptroller’s office, so the claims in the lawsuit are not yet timely, the state argues.

As passed, the digital advertising tax would levy a tiered assessment based on a company’s annual digital advertising revenue in Maryland and its global gross revenues.

Companies that make more than $100 million in global gross revenues annually would pay a 2.5 percent tax on annual revenues from digital advertising in Maryland. That tax rate increases up to 10 percent for companies that make more than $15 billion globally.

An analysis from S&P Global Market Intelligence concluded that Amazon, Google, Facebook and Microsoft would be taxed at the highest 10% rate, and Twitter, Snap and Pinterest would be taxed at a 5% rate.

Democrats who supported the bill during legislative debate said the tax would require large tech companies ― with the power to store and manipulate users’ data and fuel misinformation campaigns ― to support public civic infrastructure; money raised from the tax would be directed to the state’s multi-billion education reform plan.

In their initial filing, the U.S. Chamber, Internet Association and other groups complained that the new tax isn’t a tax at all, but an unacceptably high “punitive fee, penalty or fine” because the state disapproves of the companies’ business models.

Because the law does not prohibit any of the companies from continuing to operate as usual, the payment required could not be construed as a penalty and is clearly a tax, the state argues.

Small companies in Maryland have also opposed the tax, arguing that large tech companies will pass the fee on to them.

During the 2021 General Assembly session, lawmakers passed an emergency bill to prohibit tech companies from passing the tax down to advertisers through a fee or surcharge. The measure also delayed implementation of the bill by a year.

second case filed by Comcast in Anne Arundel County Circuit Court remains pending.

The Maryland law was the first of its kind to pass in the United States, but at least nine other states have considered similar measures in an effort to regulate tech companies’ use of personal data.

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