Maryland tax on digital ads violated Big Tech's free speech, judges say

Key Points

• Maryland's digital advertising tax was struck down by a federal appeals court, which ruled it violated Big Tech's free speech by preventing companies from informing customers about the tax's impact on pricing.
• The tax specifically targets large tech companies like Meta, Google, and Amazon, and was projected to raise approximately $250 million annually for K-12 education funding.
• The 4th U.S. Circuit Court of Appeals unanimously sided with trade associations opposing the tax, highlighting concerns over censorship and the right to criticize government actions.
• The Maryland law had varying tax rates based on global revenue, with rates ranging from 2.5% to 10% for companies exceeding $100 million in annual gross revenues.

ANNAPOLIS, Md. (AP) — Maryland’s first-in-the-nation tax on digital advertising violated the Constitution, a federal appeals court says, because blocking Big Tech from telling customers about the tax violates the companies’ right to free speech.

Supporters say Maryland needed to overhaul its tax methods in response to significant changes in how businesses advertise. The tax focuses on large companies that make money advertising on the internet such as Meta, Google and Amazon, who say they’re being unfairly targeted.

The ongoing legal fight is being watched by other states that are considering taxes for online ads. Maryland estimated the tax could raise about $250 million a year to help pay for a sweeping K-12 education measure.

Maryland’s law says the companies must not only pay the tax, but avoid telling customers how it affects pricing, with no line items, surcharges or fees, said the appeals court Friday in siding with trade associations fighting the tax.

Judge Julius Richardson cited the Colonial-era Stamp Act, which helped spark the Revolutionary War, and wrote that “criticizing the government — for taxes or anything else — is important discourse in a democratic society.”

The plaintiffs contended Maryland lawmakers were trying to insulate themselves from criticism and political accountability by forbidding companies from explaining the tax to their customers.

“A state cannot duck criticism by silencing those affected by its tax,” the judge wrote.

The unanimous ruling by the 4th U.S. Circuit Court of Appeals reverses a decision by U.S. District Judge Lydia Kay Griggsby and sends the case back to her with instructions to consider an appropriate remedy in light of the panel’s decision.

Trade groups praised the decision.

“Maryland tried to prevent criticism of its tax scheme, and the Fourth Circuit recognized that tactic for what it was: censorship,” said Paul Taske, co-director of the NetChoice Litigation Center, said in a statement.

Maryland Comptroller Brooke Lierman, who is the defendant in the case, and the Maryland attorney general's office, who is representing the state, declined to comment Monday.

The law has been challenged in multiple legal venues, including Maryland Tax Court, where the case is ongoing.

The law imposes a tax based on global annual gross revenues for companies that make more than $100 million globally.

Under the law, the tax rate is 2.5% for businesses making more than $100 million in global gross annual revenue; 5% for companies making $1 billion or more; 7.5% for companies making $5 billion or more and 10% for companies making $15 billion or more.

The Maryland General Assembly, which is controlled by Democrats, overrode a veto of the legislation in 2021 by then-Gov. Larry Hogan, a Republican.