Even though Maryland’s digital advertising tax recently went into effect, it faces several compelling legal challenges. A coalition of technology and businesses organizations say the new case violates three specific laws, including The Permanent Internet Tax Freedom Act (PITFA), the Commerce Clause and the Due Process Clause.
Tax experts say the Commerce Clause argument provides the most viable route to overturning the Maryland tax. It mentions that state and local laws are unconstitutional if they place undue burden on interstate commerce, favor local economic interests or discriminate by favoring local economic interests.
The coalition claims that Maryland’s tax runs afoul of the Commerce Clause because the state’s digital ad tax rate is based on global gross revenues of platforms. According to the coalition, since Maryland plays no role in economic activity outside of the state, it can’t base its tax rate on revenues being collected worldwide.
While the case is strong, it faces some hurdles given the fiscal realities of a post-COVID world as well as judicial attitudes toward taxing the digital economy. Much like the Wayfair ruling, Maryland courts could consider these new taxation methods as a way of fairly implementing a tax regime that addresses the way the world does business in the digital age.