Wes Moore’s First Budget Depends On Tax Recently Struck Down In Court

The current state budget in Maryland, which Governor Wes Moore (D-Md.) signed into law in May, assumes that the state’s digital advertising tax, which Maryland legislators enacted by overriding a veto from then-Governor Larry Hogan (R) in 2021, will bring in $83 million dollars in this coming year. However, Governor Moore’s first budget might already have an $83 million hole in it thanks to an August 15 ruling issued by the fourth district U.S. Circuit Court of Appeals, which partially struck down the tax as a violation of the U.S. Constitution’s First Amendment.

“Although the revenue from the digital tax has not been made public, it has been reported that Maryland collected approximately $93 million in 2022 and $82.5 million in 2023,” noted a recent Anrok update on the case. “All of the revenue is earmarked for the state’s education system.”

“When Maryland lawmakers celebrated overriding Gov. Larry Hogan’s veto in February 2021 to enact the nation’s first digital advertising tax, they envisioned a groundbreaking revenue stream that would generate up to $250 million annually for education reforms,” noted recent analysis by the University of Maryland’s Robert H. Smith School of Business. “Four years later, ‘that pioneering spirit has turned into a cautionary tale of unintended consequences, endless litigation and a tax that may ultimately cost the state far more than it ever collected,’ says accounting lecturer Samuel Handwerger, upon a federal appeals court ruling the tax as unconstitutional because it blocks big tech from telling customers about the tax.”

While Handwerger points to Maryland’s digital ad tax and the ensuing legal battle as a cautionary tale, it hasn’t shaken the confidence of digital ad tax supporters in Washington State, where “digital advertising costs are about to jump roughly 10% for Washington businesses thanks to a record tax package rammed through the legislature last spring,” writes Amber Gunn, senior policy analyst for the Mountain States Policy Center, in an op-ed published September 30.

“In total, the new tax package is expected to generate more than $9 billion to prop up state spending in the current budget,” Gunn added. “Just over one billion will come from extending the retail sales tax to ‘advertising services’ and several high-tech categories (IT support, custom software and website development, security, temporary staffing, and more).”

Gunn goes on to explain how the legal challenge that was subsequently filed against Washington’s new digital ad tax was both predictable and avoidable:

“In what can only be described as an obvious response, Comcast is suing the state over it. The complaint argues the advertising provision violates the federal Internet Tax Freedom Act (ITFA), which forbids states from imposing taxes that discriminate against “electronic commerce.” Taxing online advertising while exempting most traditional media is a textbook example of what the federal law was designed to preclude. The company is asking the court to declare the law invalid and stop Washington from enforcing it. A similar digital advertising tax in Maryland is in the midst of a multi-year legal battle over its constitutionality. Rulings to date have found the tax unconstitutional. The legal uncertainty and novelty of the tax should have given legislators pause. Relying on a tax that may ultimately be repealed to fund essential services is spectacularly foolish.”

The way in which Washington State is administering its digital ad tax, Gunn explains, disproportionately harms and disadvantages small businesses:

“The state wants digital advertisers to calculate, allocate and document taxable activity across jurisdictions. But if advertisers could casually charge their clients 10% extra, they’d already be doing it. Work will shift to competitors in jurisdictions where an identical campaign isn’t saddled with Washington sales tax. Ad agencies are not the only businesses that need to worry about complex compliance. The Department of Revenue has already issued eight different interim guidance statements to help businesses understand the new law. While very large companies like Comcast have the legal and compliance staff to oppose or comply, many small businesses will be caught flat-footed, having provided services that Washington now considers taxable retail sales, but not having collected the sales tax. The penalties are steep. Service providers are not retailers (at least they weren’t before this law) and have no experience implementing destination-based taxation. If this is Washington’s way of improving the Idaho economy, they are doing a bang-up job.”

The Richmond, Virginia-based federal appeals court judge who partially struck down Maryland’s digital ad tax in August returned the case to U.S. District Judge Lydia Kay Griggsby in Maryland, who will decide appropriate remedy and ultimate course of action. If Maryland’s digital ad tax is struck down for good, as many expect, Governor Moore and state legislators might have to return to Annapolis sooner than planned in order to fill the resulting budget hole. However, Maryland and Washington State’s experience with digital ad taxes, even if they conclude as poorly as many expect, won’t be total failures. As the University of Maryland’s Handwerger points out, even if judicially struck down, Maryland’s digital ad taxes will benefit lawmakers in other states in the form of a cautionary tale.