Digital ad tax litigated in Maryland federal court case

ANNAPOLIS, Md. — Lawyers in a federal court challenge to Maryland’s first digital advertising tax argued Thursday over whether the law was an unconstitutional tax or penalty targeting Big Tech.

Maryland state attorneys and an attorney representing Big Tech presented arguments during a virtual hearing before U.S. District Judge Lydia Kay Griggsby in a case that is being closely watched by other states that are also considering a tax on online advertisements.

Julia Bernhardt, Maryland’s assistant attorney general, defended the law as a legitimate revenue-raising measure approved by the state legislature to raise funds for education. Proponents described it as a necessary step to modernizing the state’s tax system.

“It’s not a penalty, and it’s not a regulatory fee,” Bernhardt said of the law, adding, “It benefits the whole public, and that’s the most important factor .”

The law was approved by Democrats who control the legislature, despite Republican Gov. Larry Hogan’s veto, to raise about $250 million a year to help pay for a K-12 education measure aimed at expanding early childhood education, increase teacher salaries, boost college and career readiness, and help struggling schools. The law was challenged in US District Court in Maryland just days after the veto waiver last year.

Lawyers representing the United States Chamber of Commerce, the Internet Association, NetChoice and the Computer and Communications Industry Association are challenging the law. They say it violates the federal Internet Tax Freedom Act, which prohibits discrimination against e-commerce, as well as other federal laws.

Michael Kimberly, who represents the plaintiffs, argued the law was narrowly tailored, punitive and “extraordinarily burdensome”. He said it was specifically designed to have the biggest impact on companies like Facebook, Google and Amazon.

Kimberly cited criticism from Maryland lawmakers who accused Big Tech of spreading misinformation and hate speech as an indication that the legislation had a punitive intent. He also noted a follow-on bill approved by lawmakers last year that exempted broadcasting companies and news outlets.

“The explanation is clear in legislative history,” Kimberly said. “That’s because they weren’t the companies lawmakers understood to be engaging in improper conduct.”

He told the judge the take-home message was that there’s nothing wrong with selling digital advertising if you’re a small business and don’t have too much clout.

“It’s also OK to be in this business if you’re a broadcast company or a news agency, but if you’re Big Tech, it’s not OK, and once you have outsized influence, you spread hate speech, we’re going to punish you for it,” Kimberly said. “It’s clear in every element of this law.”

When the judge asked where this language could be found, Kimberly said it was part of legislative history and comments made by the sponsor of the digital ad tax legislation, the President of the Senate of Maryland, Bill Ferguson.

Griggsby said that while she understood this was one person’s view, state attorneys made it pretty clear that the money raised would go to education and that there was no nothing in the law that talks about attacking tech companies.

Kimberly said the record is clear the tax was designed to “address these negative externalities by subsidizing education to ensure that children are more technologically savvy.”

The law would tax the revenue affected companies make on digital ads served in Maryland. The tax rate would be 2.5% for businesses with gross annual revenue of $100 million; 5% for companies whose turnover is greater than or equal to 1 billion dollars; 7.5% for companies with sales of $5 billion or more and 10% for companies with sales of $15 billion or more.

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