Tax Foundation: States should note ruling against Maryland's digital ad tax

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(The Center Square) – Other states should take note after the Maryland Tax Court recently struck down that state's digital advertising tax and ordered refunds to be paid to taxpayers for more than five years worth of collections, according to The Tax Foundation.

“You see Illinois, Utah, Washington officials, they’re looking very closely at this decision because they see a preview of what might be coming for them,” Tax Foundation Senior Policy Analyst Jared Walczak told The States by The Center Square Wednesday.

Maryland’s tax court struck down the first-in-the-nation digital advertising tax on Aug. 14. The court issued the ruling in response to challenges brought by technology companies like Google, Apple and Peacock TV.

The court ruled “that Congress could not have been any clearer that it did not want internet services of any kind taxed unless other similar services in the broader sense were taxed.”

The tax has been in effect for over five years. The court also ordered taxes paid as part of the law be refunded back to those who were impacted by the tax.

“They had originally projected about $250 million a year in revenue. They've been lower than that, but it's been over $100 million each year,” Walczak said. “So we're talking probably $500-700 million dollars that they have to refund in one year because this had been collected for all these years when they knew it was likely unconstitutional, but kept collecting it.”

Signaling a potential appeal, Maryland Comptroller Brooke Lierman responded to the court’s ruling with a statement reported by MarylandMatters.org.

“I respect but strongly disagree with the decision,” the statement said. “I will continue to work with the Attorney General of Maryland in defending this important law, which aligns Maryland’s tax code with the reality of today’s economy, ensures that the country’s biggest tech companies pay their fair share, and provides essential support to Maryland’s public school systems.”

On Tuesday, the Maryland Chamber of Commerce said Friday’s ruling raises bigger questions about the state’s overall finances.

“Maryland is already confronting a projected multibillion-dollar structural budget deficit – approximately $3.1 billion and expected to grow in the years ahead,” the group said in a statement. “If the digital advertising tax revenue ultimately disappears, it adds another challenge to a fiscal outlook that is already unsustainable.”

For other states that have either enacted similar laws or are thinking about it, Walczak has a warning.

“Utah and Illinois just adopted digital advertising taxes this year. And then Washington does it a little differently,” he said. “But they did put digital advertising within their sales tax. So those three states very much have exposure here if this ruling is replicated elsewhere, as I think it very much could be.”