Maryland Tax Court strikes down the state’s digital advertising tax as unconstitutional, finding that it violates the federal Internet Tax Freedom Act, the dormant Commerce Clause and the Due Process Clause.

RF Report

The Maryland Tax Court ruled, on 14 August 2026, that the state’s Digital Advertising Gross Revenues Tax violates the federal Internet Tax Freedom Act and the dormant Commerce Clause by applying progressive rates based on global revenues while exempting non-digital advertising, and unconstitutionally targets content through news media exemptions.

The Maryland Tax Court issued three separate decisions ruling that the state’s Digital Advertising Gross Revenues Tax is unconstitutional and violates federal law. The decisions, issued in Apple Inc. v. Comptroller of Maryland (No. 23-DA-00-0456), Google LLC v. Comptroller of Maryland (No. 23-DA-00-0649), and Peacock TV, LLC v. Comptroller of Maryland (No. 23-DA-00-0654), found the 2021 statutory framework legally deficient.

These legal documents detail the Maryland Tax Court’s 2026 decision to invalidate the Maryland Digital Advertising Gross Revenues Tax in cases brought by Apple Inc. and Google LLC. The Court ruled that the state tax violates the federal Internet Tax Freedom Act (ITFA) because it targets electronic commerce while exempting similar non-digital advertising services. Additionally, the judge found the tax unconstitutional under the dormant Commerce Clause and the Due Process Clause due to its unfair apportionment.

The crucial clarification: Peacock TV’s First Amendment victory

To begin with a vital correction regarding the case of Peacock TV, LLC: the court did not reject Peacock’s free speech claims; it actually ruled in Peacock’s favour on the First Amendment, while rejecting only its Foreign Commerce Clause challenge.

  • First Amendment violation: The court held that the tax’s exemptions for “broadcast entities” and “news media entities” unconstitutionally abridged the freedom of speech and the press. Because the law exempted news and broadcast media but excluded “aggregators or republishers of third-party content,” enforcing the tax required official scrutiny of a publication’s content to determine its primary purpose. The court ruled that such content-based distinctions are incompatible with the First Amendment and found the key terms “news” and “primarily” fatally vague.
  • Foreign commerce clause rejection: The court rejected Peacock’s argument under the Foreign Commerce Clause. Applying the Japan Line framework, it held that the tax did not create a substantial risk of international multiple taxation or prevent the federal government from speaking with “one voice,” noting that international digital ad tax efforts would proceed regardless of Maryland’s laws.

Discriminatory electronic commerce and the ITFA violation

The court held that the 2021 statutory framework—which imposed a graduated gross revenues tax of 2.5% to 10% on digital advertising services provided within Maryland—violates Section 1105(2)(A)(i) of the federal Internet Tax Freedom Act (ITFA).

  • The “similarity” debate: The state argued that digital advertising is a “distinct business model” or “new industry” compared to non-digital advertising (such as print, broadcast, or billboard media, which are not taxed statewide in Maryland) due to its specialised automated targeting and tracking capabilities.
  • The purpose test: Relying on expert and fact witness testimony, the court applied a common-sense approach, concluding that digital and non-digital advertising services are indistinguishable in purpose—both seek to make an impression on an audience to induce them to take action.
  • The rejection of COMAR/TB59 regulations: The state attempted to defend the tax via Technical Bulletin 59 (TB59) and COMAR regulations, which restricted the tax only to digital advertising that was both “programmatic” and “visual”. The court rejected this, finding that introducing these operational terms does not make digital advertising any less “similar” to non-digital advertising under federal law.
  • Defences overruled: The court dismissed the state’s arguments that the ITFA lacks a private right of action, noting that the petitioners were using the ITFA to justify a valid refund claim. It also rejected the state’s Tenth Amendment “anti-commandeering” defence under Murphy, ruling that Congress acted within its plenary authority to regulate interstate commerce when enacting the ITFA.

Extraterritorial overreach and the dormant Commerce Clause

Applying the four-prong Complete Auto test, the Court held that the progressive tax structure unconstitutionally burdens interstate commerce.

  • Prong 2 (fair apportionment / external consistency): The tax rate (2.5% to 10%) was set based on a taxpayer’s global gross revenues, while only the tax base was restricted to Maryland digital advertising revenues. The court found that global revenues have no connection to a company’s actual Maryland activities. Therefore, the tax failed the external consistency test because it unconstitutionally taxed extraterritorial values by increasing local tax rates based on out-of-state activity.
  • The USD 10 million double standard: To illustrate this unfair apportionment, the court contrasted two hypothetical companies, each earning $10 million in Maryland digital advertising revenue:
    1. Company A (USD 100 million global revenue) pays a 2.5% tax rate, totalling USD 250,000.
    2. Company B (USD 15 billion+ global revenue) pays a 10% tax rate, totalling USD 1,000,000. This structure penalises more globally robust companies for their out-of-state activities, which is not a fair apportionment of tax to local economic activity.
  • Prong 3 (discrimination): The court held that unfair apportionment is de facto discrimination against interstate commerce. Because the USD 100 million global threshold essentially exempts almost all in-state Maryland businesses, the tax’s practical and intended effect is to target out-of-state tech firms to enrich the state’s coffers.
  • Prong 4 (fair relation): The court found that global revenues bear no rational relationship to any extra state services or benefits provided to these global taxpayers, violating the fair relation requirement.

Violation of the Due Process Clause

Because the progressive rate structure fails the fair apportionment and discrimination standards, the court ruled that it also violates the Due Process Clause of the Fourteenth Amendment. Specifically, the law fails the constitutional requirement of a rational relationship between the income attributed to the state and the intrastate values of the enterprise.

The procedural road ahead

The court’s orders notify the parties of their right to file a Petition for Judicial Review in the Maryland Circuit Court within thirty (30) days of the 14 August 2026 order.

While the state proceeds with this appeal, it will almost certainly seek a stay on the ordered refunds as the litigation advances toward the Supreme Court of Maryland.