Picture this: You’re at a restaurant, and the waiter brings your check. But there’s a catch — the restaurant must charge you a special “fine dining tax,” except they’re legally forbidden from telling you about it. They can’t put it on your receipt. They can’t mention it. If they raise prices to cover it, they must do so in complete silence.
Sounds absurd, right? Welcome to Maryland’s digital advertising tax saga.
What’s digital ad revenue? Maryland is taxing the money that big tech companies make from showing digital ads to Maryland residents. Think of it like this: When you see an ad on Facebook, Google or Instagram, someone paid to show you that ad. Maryland wants a cut of that advertising revenue, and that’s the digital ad revenue Maryland’s law taxes.
And like that restaurant example, the Maryland law prohibits companies subject to the tax from telling their customers — no line item on invoices showing the charge.
Back in 2021, Maryland lawmakers were feeling bold. They overrode Gov. Larry Hogan’s veto to become the first state in America to tax digital advertising. The pitch was irresistible: Make tech giants like Google, Meta and Apple pay their “fair share” — up to 10% of their ad revenues from Maryland — and funnel a projected $250 million annually into education reform. Who could argue with that?
Well, as it turns out, the U.S. Constitution could — and it just did. Last month, U.S. District Judge Lydia Kay Griggsby struck down the law’s prohibition on companies disclosing the tax to customers, ruling it “facially violates the First Amendment.” The state won’t appeal.
The warnings were there. Former Maryland Attorney General Brian Frosh had cautioned legislators that the proposal was “not clearly unconstitutional” — a diplomatic way of saying his office, whose job is to defend legislation in court, had significant concerns but couldn’t definitively call it illegal. Two dozen business groups urged a veto, specifically warning about First Amendment violations. But the veto-proof Democratic legislature pressed forward anyway in a marathon session that mass-passed 500 bills before adjourning for COVID-19.
Maryland projected $250 million a year from the new tax, where revenues were supposed to fund the Blueprint for Maryland’s Future — Maryland’s ambitious education reform program. Teachers and students were counting on that money. They’ve collected about $419 million total since 2022 — far short of projections.
In addition to that freedom of speech violation, the digital advertising tax is currently being challenged on so many other constitutional grounds it reads like a law school exam question gone wild — where all of the following have been charged in court cases:
First Amendment violation? Check — and now officially ruled unconstitutional.
Internet Tax Freedom Act? Yep. It’s possible the law discriminates against digital services, which federal law prohibits.
Commerce Clause issues? Charged in court because the law targets out-of-state companies based on global revenue so that it may unfairly, albeit indirectly, discriminate against out-of-state companies, a violation based on its interference with fair trade with interstate transactions.
Foreign Commerce Clause? Incredibly, yes. The law has been accused of interfering with international trade negotiations.
While the First Amendment violation has struck down the freedom of speech clause, the tax is still on the books, with disclosure now allowed. But a ruling in favor of any of these other challenges and the tax will be retroactively nixed, causing refund claims in excess of $400 million with interest at 9% per year. Ouch.
The problem isn’t that lawmakers wanted to fund education — that’s admirable. The problem is they built their revenue dream on a legal house of cards that’s now collapsing from multiple directions simultaneously.
Maryland has been down this road before. Remember Comptroller v. Wynne in 2015? The Supreme Court struck down Maryland’s income tax credit structure for violating the Commerce Clause’s “internal consistency test,” triggering massive refunds.
Maryland’s digital ad tax is a masterclass in what happens when political ambition collides with constitutional reality. Yes, everyone wants better schools. Yes, tech companies can afford to pay more. But wanting something badly doesn’t make unconstitutional laws magically legal — as Maryland just learned the hard way, yet again.
Samuel Handwerger is a senior lecturer in the accounting and information assurance department at the University of Maryland’s Robert H. Smith School of Business.
