Md. Supreme Court Weighs Process in Digital Ad Tax Challenge

A Maryland Supreme Court justice asked why the panel should consider ISPs’ constitutional arguments against the state’s digital ad tax due to possible jurisdictional issues. The state high court held oral argument Friday on Maryland’s appeal of a lower court’s decision to strike down the tax as unconstitutional.

Maryland argues Comcast and Verizon failed to exhaust all administrative remedies, so their claims should be dismissed (see 2303020067). But the Circuit Court for Anne Arundel County agreed with the ISPs’ argument that a constitutional exception applies (see 2304030045).

Maryland sees nothing special here to warrant an exception to usual process, said Julia Bernhardt, litigation chief for Maryland Attorney General Anthony Brown (D). "This is just a routine case of businesses that claim their taxes aren't constitutional." Such claims should be presented to the tax court, she said at the livestreamed argument. Maryland Tax-General Section 13-505 sets a comprehensive remedy mechanism as the exclusive means for contesting a tax and prohibits court challenges to tax assessment or collection, said Bernhardt. “This is an exclusive remedy, and our administrative remedy procedure is sound.”

“This is a very unconstitutional tax,” said Eversheds Sutherland attorney Jeffrey Friedman, representing the ISPs. "It is like a law school exam question gone awry." Maryland’s tax is the first in the nation to target electronic commerce specifically and solely, in violation of the Internet Tax Freedom Act (ITFA), he said. Also, it violates the dormant commerce clause by targeting out-of-state companies, and it violates the First Amendment by targeting speech and speakers, he said.

“You make a lot of interesting constitutional arguments,” interjected Justice Brynja Booth, “but why should we consider it here given the exhaustion of administrative remedies [argument]?” Friedman responded that a constitutional exception applies in cases, like here, where the Maryland legislature passes a law that’s “facially unconstitutional” and the litigant challenges the entire law, he said.

The exception doesn’t apply “where the General Assembly has enacted an exclusive remedy -- and our case law is pretty clear on that,” responded Booth. “If we recognized the constitutional exception here, would we not be creating a scenario where there’s a rush to the court,” including by taxpayers who want “to get declaratory judgments before there’s any adverse impact by the tax court?” Chief Justice Matthew Fader noted, “If it’s an exclusive remedy, the constitutional exception just doesn’t apply no matter what.”

“There’s no benefit to this court of running through an exhaustion process needlessly when it’s a new tax that violates the First Amendment, the dormant commerce clause and” ITFA, and where there’s no enforcement experience, Friedman said. “It would be a hoop not worth jumping through.” Fader responded, “That’s for the General Assembly to decide. Not us.”

Some justices sought to clarify if Maryland was currently enforcing the digital ad tax. Maryland is enforcing the tax, said Friedman, citing a fact sheet on how to comply with the new tax the comptroller posted to its website in February, months after the lower court ruled the tax was unconstitutional. However, Bernhardt said the state isn't enforcing the tax, with the lower court’s judgment having the effect of preventing tax assessment. Later, Bernhardt clarified that the state isn't refusing to collect the tax from those who pay it voluntarily.

Justice Steven Gould said he didn’t understand. “You’re saying it’s having the effect of preventing the collection of a tax and … that the tax is being collected.” Bernhardt said “tax collections are way down because of” the lower court’s judgment, “so in that sense it is preventing the collection of a tax.” Also, the comptroller “is not doing assessments because of the declaratory judgment,” she said. “All of this is very contrary to legislative intent.”