Chamber: Federal Court Review of Md. Digital Ad Tax 'Sorely Needed'

"Maryland lawmakers wish to avoid political responsibility for the increased cost of digital advertising services" in the state from a tax targeting big businesses and “make it harder for appellants’ members to recover the costs … from their customers,” U.S. Chamber of Commerce replied Thursday at the 4th U.S. Circuit Court of Appeals. The Chamber disagreed with Maryland that the appeals court should dismiss its appeal from the U.S. District Court for Maryland, even though the Tax Injunction Act (TIA) preempts federal court review of state taxes.

The Chamber is appealing the district court’s March 2022 decision dismissing businesses’ challenge of the tax and the district court’s Dec. 2 dismissal of their challenge to the tax’s pass-through ban. It argues the district court failed to exercise its jurisdiction (case 22-2275). Maryland argued last month that the TIA precludes federal courts from reviewing the entire suit, which challenges the tax itself and a ban on passing through costs to customers (see 2302240047).

"Longstanding precedent confirms that the TIA does not bar federal-court review of punitive fees, which describes the levy here,” said the Chamber: “It is an exorbitantly large, restitutionary impost targeted at the gross income of just a few companies; it includes an expressly punitive pass-through provision; its proceeds are kept separate from the general treasury and used for remediation of supposed externalities; and the statutory and legislative history reveals an express intent to punish." Maryland "cites two recent cases that it says silently jettisoned nearly a century of TIA case law,” noted the Chamber: “Because that is not a credible position, the Court should reverse."

Forbidding taxpayers from attributing billing increases to the tax is “a clear-cut, content-based speech ban, which the State has failed to justify under any level of scrutiny,” the Chamber said. “Other courts have not hesitated to invalidate such laws.” Comity and abstention "doctrines are inapplicable here,” it added. The district court never said the TIA preempted review of the pass-through ban, said the business group: The Chamber isn't asking the court to stop collecting the tax; rather, it seeks an injunction to allow members to explain why prices went up by showing the tax on bills as a line item.

The 4th Circuit case goes on as the Maryland Supreme Court reviews the state’s appeal of a lower court's striking down the tax as unconstitutional (see 2303020067). That case doesn't moot the federal challenge to the pass-through ban, the Chamber said. A federal court must first conclude the state case will resolve all issues, said the group: Otherwise, it would be an abuse of discretion to abstain. "Here, there is not just doubt but certainty on this point -- the state-court action did not resolve appellants’ challenge to the pass-through provision.” Don’t forget the parties are different -- Comcast and Verizon are the state plaintiffs -- and “the federal action was filed first,” it added.

It's time to decide the merits of the pass-through ban, which the Chamber believes clearly violates the First Amendment, the business group said. “After two years of litigation before the district court -- with fourteen merits briefs and three oral arguments, but no merits decision to show for it -- this Court’s resolution of the matter without a remand is sorely needed.”