Landmark Ruling: Federal Appeals Court Strikes Down Maryland's Digital Ad Tax on Free Speech Grounds

In a significant victory for the technology industry, a federal appeals court has delivered a decisive blow to Maryland's pioneering digital advertising tax, ruling it violates the First Amendment's free speech protections. This landmark decision by the 4th U.S. Circuit Court of Appeals marks a critical moment for states nationwide eyeing similar revenue-generating schemes.

The court's unanimous decision asserted that the Maryland tax, enacted in 2021, unconstitutionally discriminated against the speech of large online platforms.

According to the ruling, the tax was not a general revenue measure, but rather a targeted levy on specific companies based on their digital content and services, thereby infringing on their First Amendment rights.

Maryland's digital ad tax was the first of its kind in the United States, designed to impose a levy on the gross revenues generated by digital advertisements within the state.

It applied a progressive tax rate, ranging from 2.5% to 10%, based on a company's annual global gross revenues. This innovative, yet controversial, approach was intended to fund public services, including education.

The legislation faced immediate legal challenges from prominent tech trade groups, including NetChoice and the Computer & Communications Industry Association (CCIA).

These organizations argued that the tax was an unconstitutional infringement on free speech and also violated the federal Internet Tax Freedom Act, which prohibits discriminatory taxes on e-commerce.

The appeals court sided with the tech industry, emphasizing that the tax 'applies only to the gross revenues of certain digital advertising services, and it imposes a higher tax rate on larger digital advertising services.' This selective application, the court reasoned, amounted to a content-based regulation on speech, which is subject to strict scrutiny under the First Amendment.

Furthermore, the court found the tax violated the Internet Tax Freedom Act by discriminating against electronic commerce.

Maryland had vigorously defended its tax, arguing it was a legitimate exercise of its taxing authority and a general revenue measure, not a speech regulation. However, the court found the state's arguments unconvincing, highlighting that the law's structure and application specifically targeted the speech activities of large online platforms.

This ruling carries significant implications beyond Maryland's borders.

It sends a strong signal to other states, such as New York, which have been considering or are in the process of drafting similar digital advertising tax legislation. The decision could effectively halt or reshape such efforts, forcing states to reconsider the constitutional implications of taxing digital services based on their content or the size of the platforms.

Although Maryland had begun collecting some revenue from the tax, estimated at over $270 million, these funds had been held in an escrow account pending the outcome of the legal challenge.

With this ruling, the future of these collected funds and the broader landscape of digital taxation in the U.S. remains a key point of discussion for policymakers and the tech industry alike.