Appeals court rules provision of digital ad tax violates First Amendment protections

A provision in Maryland’s digital ad tax is an unconstitutional restriction on free speech, a federal appeals court ruled Friday.

The 2021 law — the first of its kind in the nation — imposes taxes on large tech companies for the digital ads they sell within the state. But it also prohibits those companies from passing the tax on to consumers as a surcharge, fee or line item on their bills — what a three-judge panel of the 4th U.S. Circuit Court of Appeals saw as a ban on telling customers about the new added tax.

In a ruling that invoked American protests against the Colonial-era Stamp Act, Circuit Judge Julius Richardson wrote that, as then, “complaining about taxes remains a grand American political tradition.” And the court said Maryland lawmakers went too far by adding language to the tax bill that was intended to shield them from public criticism.

“Perhaps fearing such complaints, Maryland paired its tax with another rule,” Richardson wrote for the court. “Companies that make money advertising on the internet must not only pay the tax, but avoid telling their customers how it affects pricing: No line items, no surcharges, no fees.

“If companies pass on the cost of the tax, they must do so in silence — keeping customers in the dark about why prices have gone up and thereby insulating Maryland from political responsibility,” he wrote.

The ruling reverses a 2024 decision by U.S. District Judge Lydia Kay Griggsby, who agreed with the plaintiffs — a group of tech firms and business associations — that the law created some First Amendment issues. But she let the law stand because the offending provision had “many constitutional applications.”

Friday’s circuit court ruling sent the case back to Griggsby with instructions to determine an appropriate remedy for the plaintiffs.

The ruling is a blow to officials who looked to the unique tax to help pay for expensive K-12 education reforms contained in the Blueprint for Maryland’s Future. Expenses associated with that law continue to rise and are potentially budget busting — even if the digital ad tax survives the onslaught of legal challenges.

The 2021 law — sponsored by Baltimore Democrat and Senate President Bill Ferguson — targets big tech firms including Apple, Meta and Google.

Under the law, companies reporting $100 million of gross global annual revenue are subject to a 2.5% levy. The tax increases in increments of 2.5% to a maximum rate of 10% levied against companies reporting more than $15 billion in gross global revenue.

The state could collect as much as $250 million annually from the digital ad tax, according to a legislative analysis. The funds are earmarked for the education reform program.

Neither Ferguson nor Democratic Comptroller Brooke Lierman, the defendant in the lawsuit, immediately responded to requests for comment on the ruling Friday.

But plaintiffs welcomed the decision. This case was just one of several challenges brought by NetChoice, a trade group representing large technology and social media companies, the U.S. Chamber of Commerce and the Computer & Communications Industry Association (CCIA).

“The government has no power to silence dissent in America. Maryland tried to prevent criticism of its tax scheme, and the Fourth Circuit recognized that tactic for what it was: censorship,” Paul Taske, co-director of the NetChoice Litigation Center, said in a statement.

“When states enact new policies, they should expect a variety of opinions, and the First Amendment prohibits the government from insulating itself against criticism,” Taske’s statement said. “That does not change when the criticism happens online. The Fourth Circuit was absolutely correct.”

He was echoed by Stephanie Joyce, senior vice president of CCIA and director of its Litigation Center for the Connected Economy. She said in a statement that the court “recognized that this Maryland law strikes at the heart of free speech. States cannot use their taxation authority as a lever to squelch discourse and dissent.”

Richardson wrote that the Maryland law allowed tech companies to collect from customers, but not to indicate why or how their bills had gone up. That “pass-through” language “makes plenty of sense if Maryland’s true aim is to prevent companies from identifying who is politically accountable for the tax,” the court wrote.

“Faced with rising prices, consumers will want to know: ‘Why have prices been raised?’ Yet the pass-through ‘prevents [companies] from describing the tax in the one setting where the consumer is guaranteed to look: the invoice,’” the ruling said. “No doubt, Maryland has prudential reasons not to want the question answered. But as all we have said so far should make clear, keeping out of hot water with voters is not among the interests that can justify a speech ban. ”

Meanwhile, big tech firms, including Apple and Meta, took their case to Maryland Tax Court to try to thwart the law. That case remains open.

Last summer, attorneys representing Google and Meta, in an online seminar with the California Tax Foundation, predicted Maryland courts would overturn the law because it violates the federal Internet Tax Freedom Act.