RICHMOND, Va. (CN) — The Fourth Circuit heard from tech associations Wednesday that argued Maryland is punishing digital advertisers for legal conduct.
The Chamber of Commerce of the United States and several membership-based tech trade associations initiated a lawsuit against Maryland's 2021 Digital Ad Tax Act, claiming the act retaliates against successful digital advertisers, like Meta or Google, for creating what the state says is a haven for dangerous misinformation and hate speech.
"Imposed essentially as a recurring fine for perceived misconduct, the act is punitive at every turn and functions nothing like a classic tax," the associations' brief states. "And it is illegal many times over."
According to the state's brief, the act imposes a tax on a business's annual gross revenues from digital advertising services in Maryland if the company has at least $100 million in global gross yearly revenues for funds for Maryland public schools. The tax is tiered based on extraterritorial economic activity.
An amendment to the act added a pass-through provision barring advertisers from passing on the tax cost to a customer who purchases the digital advertising services using a separate fee, surcharge or line item.
The trade associations view this as a First Amendment violation because Maryland restricts protected speech.
"The pass-through provision is a content-based speech ban that fails any level of scrutiny," attorney Michael Kimberly of McDermott, Will & Emery LLP, representing the associations, said.
The lower court dismissed the association's constitutional and statutory challenges for lack of jurisdiction, finding the claims precluded by the Tax Injunction Act. That law states that unless through an outlined exception, no suit to restrain the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.
"The TIA's jurisdictional barrier applies to actions for declaratory and injunctive relief seeking to invalidate and enjoin collection of a tax, as this lawsuit does," the state's brief states.
The lower court found the First Amendment claim moot in light of concurring state litigation where a Maryland court found the act unlawful. The Supreme Court of Maryland has since reversed the lower state court's ruling.
The Fourth Circuit panel discussed the threshold issue of jurisdiction in light of the TIA. The associations argue that since the case revolves around whether the Digital Ad Act is a tax or punishment, it should not be barred by the TIA, pointing to a Supreme Court and Ninth Circuit precedence. U.S. Circuit Judge Toby J. Heytens, a Joe Biden appointee, disagreed that the examples dictate when to apply the TIA.
"I've read both of those, and with all due respect, I don't read either one of those cases as remotely standing for that proposition," Heytens said.
Assistant Attorney General Julia Doyle Bernhardt emphasized that no matter how you look at the Digital Ad Act, it is a tax under the TIA.
"The choice of the test is not outcome determinative in this case because, under any test, this is a tax and not a penalty," Bernhardt told the three-judge panel.
U.S. Circuit Judge Julius N. Richardson, a Donald Trump appointee, outlined the uniqueness of the Digital Ad Act through a series of questions to Bernhardt, including whether Maryland had any other taxes imposed on gross revenue, taxes that set the rate based on a company's success or that target specific companies.
"Do you have any other examples of Maryland taxes or fees that target companies in the manner that you've done here?" Richardson asked Bernhardt. "If there are no others that fit this category, that's suggestive that you're really just trying to punish this very narrow set of companies."
Bernhardt argued that gambling, tobacco, gas and alcohol taxes all impact specific industries. Richardson disagreed with the comparison, stating that those taxes are different because they impact the consumer rather than the few entities providing the taxable products.
Senior U.S. Circuit Judge Henry F. Floyd, a Barack Obama appointee, completed the panel. Attorneys representing the associations and the state did not respond to requests for comment.
The judges did not disclose when they would publish a ruling.
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