Maryland high court reinstates digital ad tax

First-in-the-nation tax survives another day

May 30, 2023
Business tax State & local tax Regulatory compliance

Executive summary

On May 9, 2023, the Maryland Supreme Court overturned a circuit court’s decision that found in October that the state’s digital advertising tax violates the Internet Tax Freedom Act, discriminates against interstate commerce and violates the First Amendment. The supreme court ruled that the taxpayers were required to exhaust their administrative remedies before challenging the tax in circuit court.

Maryland high court reinstates digital ad tax

The litigation and order

Since our last update, oral arguments on the constitutionality of the digital advertising tax were held on May 5, 2023 in front of the Maryland Supreme Court. The arguments centered around whether the taxpayers were required to exhaust their administrative remedies before filing the declaratory judgment action. Many states require taxpayers to follow the administrative appeal process before filing other actions in state courts when the issue involves the imposition of a tax. The supreme court agreed that the taxpayers had not exhausted their administrative remedies. Just four days after the oral argument, and in a per curiam order, the supreme court concluded that the Anne Arundel Circuit Court did not have jurisdiction to hear the constitutional challenge to the digital advertising tax. The order vacates the circuit court’s decision, effectively reinstating the tax. The case has been remanded back to the circuit court to be dismissed.

Compliance with the tax

Following the supreme court’s decision, the Maryland Comptroller has provided updated guidance on filing and paying the digital advertising tax. Pursuant to the guidance, the comptroller has published Form 600, Digital Advertising Gross Revenues Tax Return, a downloadable spreadsheet with instructions to complete the return. This is the first annual return due for the digital advertising tax that, after a brief delay, became effective Jan. 1, 2022. The form was due April 17, 2023. There are no applicable extension provisions, i.e., the six-month income tax filing extension does not apply to the digital advertising tax. Form 600 must also be filed if taxpayers are claiming a refund of the tax.

The guidance further explains that interest accrues on unpaid tax from the date the tax is due. Generally, estimated payments of at least 110% of the prior year tax or 90% of the current year tax qualify for a safe harbor. Because this is the first year of the tax, all taxpayers will qualify for the safe harbor and underpayment penalties will not be imposed on 2022 filings. Finally, the form for 2023 estimated taxes is also available.

What’s next?

Pursuant to the order, the parties to the litigation, or any other taxpayer subject to the digital advertising tax, will need to follow the administrative process to challenge the legality of the tax. Two potential mechanisms for taxpayers include a challenge to an assessment of the tax from the comptroller, or to pay the tax and file a refund claim. A challenge to the tax was already addressed and removed from federal district court leaving taxpayers with few options for immediate relief. Challenges through the administrative process may take years before a court rules on the merits of the tax, let alone exhausting all options for appeal.  


Interestingly, while the state was appealing the circuit court ruling, the comptroller issued a notice stating it expected taxpayers to comply with the law. Businesses were faced with a decision as to whether to file and pay the digital advertising tax. The plaintiffs in this case are likely to restart the process of challenging the tax.

It is possible that the administrative process will result in a finding favorable to taxpayers. But that process will take considerable time to conclude. It is also anticipated that the comptroller will begin enforcement and collection actions against the tax. Affected taxpayers should read the guidance closely and prepare to comply. Please consult with your state and local tax advisor for more information or questions regarding the Maryland digital advertising tax. 

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