With summary judgment hearing occurring on or around May 9, 2024, we will soon know where Apple Inc. can continue its appeal in the Maryland Tax Court over a refund claim for payments of the Maryland Digital Advertising Gross Revenues Tax. The outcome of this appeal could have a major ripple effect in the future of digital advertising taxes throughout the country and is noteworthy for all businesses that participate in the digital economy, both big and small. Here, we explain the history of Maryland’s digital advertising tax, the events leading up to Apple Inc.’s refund claim appeal, and the legal arguments on both sides. If your business or clients need help resolving a sales tax audit, assessment, or refund involving digital goods and services, our sales tax professionals are here to help.
What Is the Maryland Digital Advertising Tax?
The state of Maryland enacted a tax on businesses with gross receipts from digital advertising services through passage of HB 732 and HB 787 in 2021. Only companies with over $100 million in global annual gross revenues must pay tax on the portion of their revenues that come from digital advertising services in Maryland. However, companies with over $1,000,000 in digital advertising revenue in the state must file a report with the Comptroller’s Office using Form 600. The applicable tax rate varies depending on the global gross annual revenue of the taxpayer and goes as high as ten percent for taxpayers with over $15 billion in revenue.
The Events Leading Up to Apple Inc.’s Refund Claim
Several interested parties filed lawsuits contesting the legality of the Maryland Digital Advertising Gross Revenues Tax under state and federal law were initiated soon after its passage. Last year, the Supreme Court of Maryland overturned an appellate ruling that struck down the tax citing jurisdictional issues with the case because the plaintiff had failed to exercise its administrative remedies through the Maryland Comptroller’s Office and the Maryland Tax Court. The effective dismissal of the lawsuit reinstated a related federal lawsuit challenging the tax on the grounds that it violates the First Amendment, which is currently in process at the district court level.
After these events, Apple Inc. petitioned the Maryland Tax Court on August 28, 2023 to invalidate the digital advertising tax under existing federal law and to enforce a refund claim over its tax payments made in 2022. The Attorney General of Maryland filed a Motion to Dismiss dated September 13, 2023, on behalf of the Comptroller of Maryland. After these initial filings, the parties filed additional responses leading up to oral argument and the anticipated ruling from the Maryland Tax Court.
What Are the Grounds for Apple Inc.’s Refund Claim in Its Petition to the Maryland Tax Court
In its petition, Apple Inc. raises three questions about the validity of the Maryland Digital Advertising Gross Revenues Tax. The first is whether the tax violates the Internet Tax Freedom Act, the Supremacy Clause of the U.S. Constitution, and Article 2 of the Maryland Constitution’s Declaration of Rights. Apple Inc. argues the tax violates these laws because it is discriminatory tax that only applies to electronic commerce and does not target other traditional forms of advertising, such as print or radio.
Second, Apple Inc. claims the Digital Advertising Gross Revenues Tax violates the Commerce Clause of the U.S. Constitution. The third and final argument of Apple Inc.’s petition is that the tax violates the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution and Article 24 of Maryland Constitution’s Declaration of Rights. Apple Inc. contends the tax violates the Commerce and Due Process Clauses in two aspects– (1) the lack of clarity for how taxpayers are to determine their taxable revenue from digital advertising in the states and (2) that the tax is based on, and discriminates against, activity outside Maryland through its definition of “annual gross revenues” without substantial nexus or apportionment to the state.
The Maryland Comptroller’s Position as Stated in Its Motion to Dismiss
The Comptroller of Maryland attacked Apple Inc.’s petition for appeal on the ground that the refund claim failed to comply with the standards and requirements of Maryland state law. However, the Maryland Tax Court rejected this argument in denying the motion to dismiss, and the case has now proceeded to the summary judgment stage with hearings taking place earlier in May 2024. The Court’s ruling on summary judgment will decide whether a further decision is made by the Court on the substantive legal challenges made to the Digital Advertising Gross Revenues Tax in Apple Inc.’s petition.
The Potential Impact of Apple’s Refund Claim Appeal on Future Digital Advertising Taxes
Final review of Maryland’s Digital Advertising Tax could take some time to complete, assuming further challenges up to the Supreme Court of Maryland and the U.S. Federal Courts. Ultimately, the outcome of Maryland’s tax may only impact the speed at which states can implement digital advertising taxes or taxes similar to it. State legislatures could revise their digital advertising tax proposals to better comply with federal and constitutional issues after resolution of Apple Inc.’s refund claim. Company in the digital economy should stay aware of developments in the legal battle with Maryland’s digital advertising tax and the reaction from other states looking to impose similar taxes. Now may be the time to review data collecting and control systems to develop a strategy for complying with future state sales taxes involving your digital goods and services.
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