Md. Digital Ad Tax ‘Illegal Many Times Over,’ Says Appellants’ Brief

It's the “duty” of federal courts to exercise their case jurisdiction “in all but the most exceptional circumstances,” but the district court in businesses’ challenge of Maryland’s digital ad tax “twice refused to do so,” said the U.S. Chamber of Commerce’s opening brief Tuesday (docket 22-2275) at the 4th U.S. Circuit Court of Appeals.

The Chamber is appealing the district court’s March decision dismissing the businesses’ challenge of the tax and its Dec. 2 dismissal of their challenge to the tax's pass-through ban (see 2212160050). NetChoice and CCIA are co-appellants.

The district court first erred when it refused to review the appellants’ constitutional and statutory challenges to the “punitive levy” imposed by the tax, in the “mistaken belief” that the federal Tax Injunction Act (TIA) “bars such review,” said the brief. Then the lower court refused on “mootness grounds” to rule on the appellants’ remaining challenge to the Maryland statute’s speech ban, because a Maryland court in another case held the levy, but not the speech ban, to be unlawful, it said: “Neither reason for declining jurisdiction withstands scrutiny.”

Maryland assesses an “extraordinary levy” on large digital advertising companies that do business in the state, said the brief. Imposed essentially as a “recurring fine for perceived misconduct,” the tax is “punitive at every turn and functions nothing like a classic tax,” it said. “It is illegal many times over,” it said.

The tax “explicitly disadvantages” e-commerce, compared with other forms of commerce, in violation of the Internet Tax Freedom Act, said the brief. “The severity of its surcharge is based on companies’ extraterritorial conduct rather than their transactions within Maryland,” violating the Constitution’s commerce clause and due process clause. It also prohibits companies from identifying the nature and amount of the levy on customer invoices “in plain violation” of the First Amendment’s “bar on content-based speech bans,” the brief said.

The district court wrongly concluded under the TIA that it could consider only appellants’ challenge to the state’s speech ban, said the brief. But as a “century of precedent makes clear,” the TIA bars pre-enforcement review in federal court only when a plaintiff challenges a “classic” tax, not a punitive fee, it said. “Relying on mootness, the district court later concluded that it could not consider any element of this case.”

Though appellants are “happy to see” that a Maryland state court confirmed some of the tax’s “many legal flaws,” that decision “did not address the speech ban, which has ongoing importance to businesses that have already paid assessments,” said the brief. Companies must decide, with great uncertainty, “what they can communicate to their customers about cost increases,” it said.

Further confounding the uncertainty to businesses, the decision is under appeal, and the state indicated it may continue enforcing the tax as the appeal plays out, said the brief. The district court “should have resolved the merits of appellants’ claims and entered final judgment in their favor,” it said. The 4th Circuit “should reverse and remand with instructions to do so,” it said.