Key Takeaways
- The Maryland Tax Court struck down Maryland’s first-in-the-nation Digital Advertising Gross Revenues Tax (“DAT”). The court concluded that the tax discriminated against electronic commerce in violation of the federal Internet Tax Freedom Act ("ITFA") and is preempted by federal law.
- The court ruled in separate cases brought by Apple Inc., Google LLC, and Peacock TV LLC (“Taxpayers”) and ordered refunds of tax paid for tax year 2022, with interest. The court also found that the tax violated the Dormant Commerce Clause and Due Process Clause of the U.S. Constitution.
- The decisions are significant because they address the extent to which states may impose taxes specifically targeting digital advertising while comparable nondigital advertising remains untaxed. Further judicial review is expected.
Background
Maryland enacted its DAT in 2021, becoming the first state to impose a tax specifically on revenues derived from digital advertising services. The tax applies to businesses with at least $100 million in global annual gross revenues and at least $1 million in annual gross revenues derived from digital advertising services in Maryland. The tax rate ranges from 2.5% to 10% based on a taxpayer’s annual global gross revenues.
The tax has faced litigation since its enactment. Among the challenges were separate refund proceedings brought by Taxpayers before the Maryland Tax Court. The companies argued, among other things, that Maryland’s tax violated ITFA because it imposed a tax on digital advertising without imposing a comparable tax on similar nondigital advertising.
On August 14, 2026, the Maryland Tax Court issued decisions in Apple Inc. v. Comptroller of Maryland, No. 23-DA-OO-0456, Google LLC v. Comptroller of Maryland, No. 23-DA-OO-0649, and Peacock TV LLC v. Comptroller of Maryland, No. 23-DA-OO-0654, siding with the Taxpayers and striking down the tax.
Maryland’s Tax Court Decisions
The central issue under ITFA was whether digital advertising and nondigital advertising constitute similar services. ITFA prohibits state and local taxes that discriminate against electronic commerce, including taxes imposed on electronic commerce that are not imposed on similar property, goods, services, or information accomplished through other means.
The Maryland Comptroller advocated for a narrower comparison between digital and nondigital advertising. The Taxpayers, in contrast, focused on the broader characteristics and functions of advertising delivered through different media.
The Tax Court agreed with the Taxpayers. The court found that, in the context of ITFA, digital and nondigital advertising services are not merely similar but are currently “indistinguishable,” emphasizing that both share the same fundamental purpose: influencing consumers to purchase goods or take other action. The court rejected the Comptroller’s focus on differences in business models and technical operations, reasoning that ITFA requires comparison of the transactions and services themselves. Because Maryland imposes the tax on digital advertising services while leaving comparable nondigital advertising services untaxed, the court concluded that the tax discriminates against electronic commerce in violation of ITFA and is preempted by federal law.
The Tax Court separately concluded that the tax violated the Dormant Commerce Clause because its graduated rates and $100 million threshold depend on global revenues rather than Maryland activity. The court found that the tax was not fairly apportioned and, in practical effect, discriminated against businesses with substantial out-of-state activity. The court also concluded that the tax violated the Due Process Clause because the income attributed to Maryland lacked the required rational relationship to the taxpayer’s intrastate values. The court reversed the Comptroller’s refund denials and ordered refunds of the tax paid for tax year 2022, with interest.
Forvis Mazars Insight: The ITFA analysis may have significance beyond Maryland. The court focused on whether electronically delivered and nondigital services are similar in purpose and substance, rather than whether their business models or technical operations differ. As states continue to consider new approaches for taxing digital activity, the decisions highlight potential federal limitations on taxes that single out electronically delivered transactions or services while leaving similar nondigital activity outside the tax base.
Further Judicial Review
The August 14th decisions are unlikely to be the final word on Maryland’s DAT. Following the decisions, Maryland Comptroller Brooke Lierman stated that she disagreed with the rulings and that the Comptroller and Maryland Attorney General would continue to defend the tax.
Under Maryland law, a final order of the Maryland Tax Court is subject to judicial review, and any party to the Tax Court proceeding (including a governmental unit) may seek review in a Maryland circuit court. Md. Code Ann., Tax-Gen. § 13-532. Judicial review is governed by the standards applicable to contested administrative cases under Md. Code Ann., State Gov’t § 10-222.
Unlike the de novo proceeding before the Maryland Tax Court, circuit court review focuses on the record developed before the Tax Court. The court may affirm the Tax Court, remand the matter for further proceedings, or reverse or modify the decision on grounds specified in Maryland’s judicial review statute. The orders state that a petition for judicial review must be filed in the proper circuit court within 30 days of the Tax Court’s August 14th orders. Further appellate review may follow.
Accordingly, businesses affected by the DAT will need to continue monitoring the litigation as it moves through the Maryland courts.
Forvis Mazars Insight: The possibility of further judicial review makes procedural considerations particularly important for affected taxpayers. Businesses that have paid Maryland DAT, have pending refund claims, or remain subject to filing requirements may want to evaluate the status of their particular tax years and applicable procedural deadlines rather than assuming the August 14th decisions have resolved those obligations for all taxpayers.
Implications Beyond Maryland
Although Maryland was the first state to enact a standalone digital advertising tax, legislators and tax administrators across the country have continued to explore methods of taxing digital advertising and other components of the digital economy.
The Maryland Tax Court’s analysis provides an important framework for evaluating state taxes that distinguish between digital and nondigital activity. In applying ITFA, the court focused on whether the underlying transactions and services are similar, concluding that differences in delivery technology, business models, or technical operations did not overcome the common purpose and characteristics of digital and non-digital advertising services.
The decisions therefore may influence how other states design or evaluate taxes aimed specifically at digital advertising or electronic commerce. States considering similar measures may need to account for whether electronically delivered services are treated differently from comparable services delivered through traditional channels, as well as whether tax thresholds or rates tied to global activity create constitutional apportionment or discrimination concerns.
Forvis Mazars Insight: The broader significance of the Maryland decisions is not limited to taxpayers currently subject to Maryland’s tax. The rulings may affect the development of digital advertising tax proposals in other jurisdictions and provide an additional framework for evaluating existing or proposed taxes that distinguish between digital and nondigital activity.
How Forvis Mazars Can Help
The state and local tax landscape for digital advertising and other digital services continues to develop rapidly. Forvis Mazars can help you evaluate how Maryland’s DAT and similar state tax developments may affect your business, including considering filing and payment obligations, evaluating refund opportunities and procedural deadlines, and monitoring legislative and litigation developments involving the taxation of digital activity.
If you have questions about the Maryland decisions or state taxation of digital advertising and digital services more broadly, please contact a member of the Forvis Mazars State & Local Tax team.