Tech and AI

A tax on digital advertising is struck down, and the money already collected has to go back

By Staff Writer  |  16 August 2026

Maryland's tax court ruled on Friday that the state's digital advertising tax breaches federal law and the constitution, and ordered refunds to the three companies that brought the challenge. About $535m has been collected since the tax took effect.

The Maryland Tax Court struck down the state's tax on digital advertising on Friday and ordered the state to repay what the three challengers had paid under it. The challenges were brought by Apple, Google and the streaming service Peacock TV. The court held that the tax breaches the federal Internet Tax Freedom Act, the First Amendment, and the commerce and due process clauses of the United States constitution.

The reasoning on the federal statute is the part with reach beyond Maryland. The 1998 legislation prevents a government taxing internet commerce differently from comparable goods or services that are not online. The court found no distinct difference between online advertising and other forms of advertising, and concluded that applying different tax rules to the two was therefore unlawful. It also held that regulating interstate commerce is a matter for Congress rather than a state legislature, and that basing the charge on a company's global revenue rather than on revenue from advertising sold in the state was the wrong measure.

What the tax did

The charge caught only the largest sellers. A company needed at least $100m in global annual revenue and at least $1m from advertisements shown to people in Maryland. Above those thresholds the rate ran from 2.5 per cent to 10 per cent, rising with global revenue. It took effect in January 2022 and has raised about $535m since, well short of the roughly $250m a year forecast when it was introduced. The proceeds were earmarked for the state's schools programme.

A rate driven by worldwide turnover rather than by turnover in the taxing jurisdiction was the feature the court fixed on. Any jurisdiction copying the model will have to answer that point before it answers anything else.

The tax has been in litigation from the beginning. A challenge in the state courts produced a ruling that the companies had not exhausted their administrative appeals, which is what sent them to the tax court in the first place. A separate federal challenge removed the part of the law that stopped companies telling customers about the tax by showing it as a line item on a bill.

The state's answer

The Comptroller, who collects the tax and was named in the case, said she would work with the attorney general to defend it.

aligns Maryland's tax code with the reality of today's economy, ensures that the country's biggest tech companies pay their fair share and provides essential support to Maryland's public school systems

Brooke Lierman, Comptroller of Maryland, on the law

The presiding officers of both chambers of the legislature issued a joint statement saying they respectfully disagreed with the ruling and expected the legal process to continue. "The General Assembly enacted the Digital Advertising Gross Revenues Tax because Maryland's tax system should keep pace with a changing economy," said Joseline Pena-Melnyk, Speaker of the House of Delegates, and Bill Ferguson, President of the Senate. They added that as commerce and advertising moved online it was appropriate to modernise the tax code so that large digital advertising companies contributed alongside other businesses operating in the state.

What happens to the money

The refund order applies to the three companies that brought these proceedings. Whether the state can or will seek review of a decision by the tax court, which is a quasi-judicial agency rather than a court of general jurisdiction, was not settled on Friday, and the amount to be repaid was not stated. Refunds could sit behind an appeal for a considerable time.

For the several other states that have watched this litigation while weighing their own online advertising levies, the useful document is not the headline but the reasoning. A tax that singles out the digital version of an activity, and then sizes the charge by what the taxpayer earns everywhere else, has now failed on both counts in one ruling.