Maryland’s tax court ruled Tuesday that the state’s digital advertising tax is invalid, ordering refunds for the companies that paid it, including Apple, Google and the streaming service Peacock. The ruling is the first time a state digital ad tax has been struck down in court, and it hands Google, the largest seller of digital ads in the country, its biggest win yet in the state-tax battles of the technology industry.
The tax was the first of its kind when Maryland passed it in 2021, a novel attempt to reach the revenue that technology giants earn from selling advertising. The state argued that digital ads had become one of the most lucrative businesses in the world and that the companies selling them should contribute to the state’s coffers. The law imposed a levy on advertising revenue above certain thresholds, with rates that rose for the largest sellers. Google, which dominates the market, stood to pay the most.
The companies fought back immediately. Google, Apple and others challenged the tax on a range of grounds, arguing that it violated federal law, discriminated against digital businesses and imposed burdens that fell unevenly across the industry. The case wound through the courts for years, and the tax court’s ruling Tuesday resolves the central question in the companies’ favor: the tax, as written, cannot stand.
The court’s reasoning, according to people who reviewed the opinion, turned on the structure of the levy rather than the principle behind it. The tax was assessed on revenue rather than on a measure of activity connected to Maryland, a design the court found ran afoul of rules governing state taxation of interstate commerce. The decision orders refunds of the amounts collected under the law. For Google, which has paid the most of any company under the tax, the refund will be the largest. The ruling also ends the compliance burden that came with it: the companies no longer have to calculate, report and defend their Maryland advertising revenue against the levy.
The ruling is a defeat for the movement to tax digital advertising at the state level. Maryland was the pioneer, and other states watched its experiment closely. The court’s decision will make it harder for states to copy the model, and it removes the largest test case from the board at a time when states are hunting for ways to tax the digital economy.
For Google, the victory is particularly valuable. The company is the dominant seller of digital advertising, and the Maryland tax was aimed squarely at its business model. The refund will be welcome, but the bigger prize is the precedent: a court has now said that the specific approach Maryland chose does not survive review, and that gives Google ammunition in any future state tax fight.
The ruling does not end the debate over taxing digital services. Maryland was not alone in eyeing digital advertising revenue: a dozen or more states have floated similar taxes since the law passed in 2021, and several modeled their proposals directly on Maryland’s design. The ruling gives opponents of those measures a ready-made precedent, and supporters a cautionary tale about drafting. States that want to tax the digital economy will now have to find structures that survive the same scrutiny.
The decision also lands in the middle of a federal argument. Lawmakers in Washington have floated taxes on digital advertising as a way to fund local journalism, and the Maryland ruling is likely to be cited by both sides: as proof that the approach is unworkable, or as a lesson in how to write it better. Other states have pursued different approaches, from taxing data use to levying taxes on cloud computing, and the federal government has long discussed a national framework for taxing digital commerce. The Maryland decision removes one tool from the states’ toolbox, but the search for revenue continues.
The reaction from the technology industry was relief, and from the state, defiance. Maryland officials said they are reviewing the ruling and weighing an appeal, and the state has defended the tax as a legitimate exercise of its authority. An appeal would send the case to the state’s highest court, extending a fight that has already lasted half a decade.
For the companies that paid, the practical effect is a return of cash and the end of a compliance burden. For the broader economy, the ruling is a marker of how difficult it is to tax the digital economy under the rules written for the analog one. The states that want to tax digital advertising will have to go back to the drawing board, and the companies that sell it will keep their money a little longer. The Maryland experiment, the first of its kind, has ended the way the industry hoped and the state feared.
