- Maryland has enacted a controversial digital advertising services tax (“DAT”) to be imposed upon gross revenues from digital advertising.
- The tax has been subject to multiple challenges from taxpayers that are in various stages of litigation.
- The portion of the statute that prevented taxpayers from explicitly and directly passing through the tax to their customers on an invoice was unanimously found to violate the first amendment to the Constitution by the United States Circuit Court of Appeals in Chamber of Commerce v. Lierman, No. 24-1727 (4th 2025).
Background
In 2021, Maryland enacted the DAT. It is imposed upon those businesses that have gross revenues of more than $1,000,000 from specified digital advertising services, with a graduated rate structure from 2.5% to 10% based upon annual gross revenues from digital advertising services.
The Pass-Through Provision
After the statute was enacted, it was amended to prevent businesses from directly passing the tax on to customers, commonly referred to as the pass-through provision. Md. Tax. Gen. § 7.5-102(c) reads, in pertinent part, “[a] person who derives gross revenues from digital advertising services in the State may not directly pass on the cost of the tax imposed under this section to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line–item.” It is this provision that the United States Chamber of Commerce (the “Chamber”) challenged as violating the First Amendment of the Constitution.
Procedural History
The Chamber initially filed suit in the matter against the Comptroller of Maryland (the “Comptroller”) in the United States District Court for the District of Maryland. The District Court dismissed the case for lack of jurisdiction, reasoning that the federal Tax Injunction Act, 28 U.S.C. § 1341, required the matter to be brought in Maryland state court. Upon the Chamber’s initial appeal to the Fourth Circuit, the non-First Amendment issues were dismissed in accord with the Tax Injunction Act, but the court remanded the case back to the District Court on the First Amendment issues, which it determined did not bar that court from hearing those issues.
The District Court, on remand, agreed that the pass-through provision prohibited speech, but the court dismissed the Chamber’s facial challenge, reasoning that there were “many” constitutional applications of the pass-through provision. Once again, the Chamber appealed this decision to the Fourth Circuit.
The Fourth Circuit’s First Amendment Opinion
The Fourth Circuit’s substantive opinion opens with a discussion of general First Amendment principles, noting “[states may make policy on contested issues. But they are not free to silence dissent….[a] state cannot duck criticism by silencing those affected by its tax.” The issue, according to the appellate court, is whether the pass-through provision is doing so here.
Having covered basic First Amendment principles, the court then turned to an interpretation of the statute in question, specifically with respect to the pass-through provision. It notes that the prohibition contained in the statute is narrow; businesses are not barred from increasing prices because of the tax. The pass-through provision merely prevents them from passing on the cost by separate fees, surcharges, or line items. Therefore, according to the court, the statutory provision in question regulates the ways in which any price increases may be communicated.
The court concluded that surcharges, fees, and line items are ways of communicating to customers – namely, what it is that they are paying for and how much they are going to pay. The Comptroller argued that surcharges and fees are not always communicated to the customer but sometimes may be internal accounting measures. While the court agreed with this in part, it noted that the use of the word “separate” in the statute clearly contemplates explicit communication to the customer. It reasoned that if the increased cost were opaque, it would not be passed on by anything separate. Additionally, the statute, according to the court, allows businesses to directly pass on the cost of the tax, but bars some of the means (separate fee, surcharge, or line item) by which it may be communicated. Put differently, digital advertising businesses may directly increase prices to cover the cost of the tax under the statute, but not by means of a separate fee, surcharge, or a line item. In doing so, the court reasoned, “…[the pass-through [provision]…restricts how companies can talk about the tax – and in so doing, it regulates speech.”
In the alternative, Maryland attempted to argue that the pass-through provision did not regulate speech, but conduct. The Comptroller claimed that the DAT attempts to regulate the structure of digital advertising transactions, and that any impact on speech is incidental. The court dismissed this argument, noting again that the statute allowed the economic impact of the tax to be passed on to customers – the law does not ban this conduct. Therefore, if the law does not ban the taxpayer’s conduct in passing along price/cost increases, it cannot be permitted to ban speech related to that conduct. Maryland argued that the Sixth Circuit Court of Appeal’s decision in BellSouth Telecoms, Inc. v. Farris, 542 F.3d 499 (6th Cir. 2008) supported its position. The court disagreed, noting that the statute at issue in BellSouth barred both collecting the tax directly from consumers, and separately stating the tax on the bill. The pass-through provision, on the other hand, merely barred the communication element, not the collection element, of BellSouth. Maryland further argued that the DAT statute barred businesses from shifting the legal incidence of the tax to their customers, which the court summarily dismissed as irrelevant, noting that the statute puts the legal onus for the tax on the businesses. Customers have no duty to pay the tax directly to the state under the statute. Therefore, surcharges, fees and line items give customers a duty to pay the company’s DAT costs, conduct that the digital advertising businesses are permitted to do under the statute. As a result, the pass-through provision does not regulate conduct, only speech.
Having concluded that the state’s conduct regulates speech, the Fourth Circuit turned to the appropriate standard to apply under the Constitution to determine if such regulation violates the First Amendment. The relevant tests are the higher strict scrutiny standard and the more lenient intermediate scrutiny. The court did not need to apply strict scrutiny since the pass-through provision could not be sustained under the lesser standard.
To pass the intermediate scrutiny standard, the state must show that its law directly advances a substantial government interest and that the burden it imposes is no more extensive than need be. At oral argument, the Comptroller affirmed that Maryland’s interest is to ensure that businesses bear the economic and legal responsibility for the tax. Considering the government’s interest, the court did not see how prohibiting certain means of passing the cost, as enumerated in the statute, but allowing all other means, advances the government’s interest. The court succinctly stated, “[p]assing the cost of the tax is passing the cost of the tax. Whether a company does it by raising prices or adding fees, the result is the same: Consumers pay.” It concluded that the purpose of the pass-through provision makes no sense considering the government’s stated interest but makes sense solely to prevent companies from identifying who is politically accountable for the tax.
The court determined that the pass-through provision is facially unconstitutional in all its applications; it remanded the case back to the district court to consider appropriate remedies.
Forvis Mazars Insight: The court’s opinion is not altogether unsurprising, because the statute did not bar businesses from recovering the costs from customers but merely informing them about it in certain ways. It will be interesting to see how the district court addresses this on remand as well as the legislature’s response to these developments.
How Forvis Mazars Can Help
Forvis Mazars can keep you apprised of the judicial, legislative, and administrative developments surrounding Maryland’s DAT. Further, we can keep you informed of relevant changes in other states as they consider taxing these activities themselves.