Maryland Digital Advertising Tax Faces Legal Challenges – What Taxpayers Need to Know

Maryland imposed the Digital Advertising Services Tax in 2022 on all in-state receipts derived from digital advertising services. The first tax return and payments should have been filed by April 15, 2022. However, three years later, the tax faces legal challenges and is the subject of discussions in federal courts because it supposedly violates the First Amendment.

Impact on Businesses: Why Companies Are Pushing Back

The United States Chamber of Commerce (Chamber) and three other trade associations initiated the court proceedings to stop the enforcement of a new state tax in Maryland. The Digital Advertising Services Tax (DAT) mandates that large technological companies pay a tax based on the gross revenue from digital advertising in Maryland.

In their lawsuit, the Chamber and associations stated that the new tax violates several acts and clauses and the First Amendment, specifically, a content-based regulation of speech.

While the cases are still pending in the US Court of Appeals and the Maryland Tax Court, the Maryland Comptroller, who is in charge of all tax-related matters, did not specify the DAT's statutory refund period. In Maryland, the statute of limitations for most tax claims is three years, which means that the same rule applies to any refunds that taxpayers may request from the Comptroller. Therefore, all those who want to claim a refund have until April 15, 2025, to file a request.

Even if one of the two courts finds that the law violates specific provisions of the stated acts, clauses, and the First Amendment and declares it invalid, it is uncertain to what extent the refund will be allowed for claims outside the statute of limitations.

Conclusion

Despite the Fourteenth Amendment's Due Process Clause requiring remedies for unconstitutional government actions, Maryland's projected USD 2.7 billion budget shortfall for 2025 may lead the state to limit retroactive relief or cash refunds if DAT is declared invalid.

Since neither case is expected to be resolved until late 2025 at the earliest, taxpayers who submitted tax returns and paid due tax under the rules for DAT in 2022 should consider filing a refund claim before the statute of limitations period expires. In that case, if the law is declared invalid, they will keep their rights to any refunds that may ultimately be determined. 

Source: EY