The Maryland Tax Court issued three companion decisions earlier this month striking down Maryland’s Digital Advertising Gross Revenues Tax (DAGRT) in Apple Inc. v. Comptroller of Maryland, No. 23-DA-OO-0456, Google LLC v. Comptroller of Maryland, and Peacock TV, LLC v. Comptroller of Maryland. The court granted summary judgment to all three petitioners, finding that the tax violates the federal Internet Tax Freedom Act (ITFA), the dormant Commerce Clause and the Due Process Clause of the U.S. Constitution.

The court ordered the comptroller to refund the tax paid with interest. These are the first substantive merits decisions on the tax, and they mark a significant victory for taxpayers challenging Maryland’s first-in-the-nation digital advertising tax. More importantly, they provide the first judicial test of the ITFA’s anti-discrimination provision in the context of a gross receipts tax on advertising, an area where the statute’s operative term “similar” had never been litigated at this level of factual development.

Background

Maryland enacted the DAGRT in 2021, becoming the first state to impose a gross receipts tax specifically targeting digital advertising revenues. The tax applies to entities with at least $100 million in global annual gross revenues that derive at least $1 million in Maryland digital advertising revenue. Rates are graduated from 2.5% to 10% based on global revenues. Maryland does not impose a comparable statewide tax on nondigital advertising. That asymmetry became the central vulnerability. Put simply, if you tax the digital but do not also tax the similar non-digital, the ITFA does the rest.

Then-Gov. Larry Hogan vetoed the legislation, and the General Assembly overrode him. The state collected approximately $535.5 million through July 2026, all of which was segregated and unspent pending litigation.

Prior Litigation

The tax has been the subject of multiple challenges since its enactment. In Chamber of Commerce of the United States of America, et al. v. Francho, a federal action was largely barred by the Tax Injunction Act, though a narrow First Amendment challenge to the pass-through prohibition survived. In Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC, et al. v. Comptroller of the Treasury of Maryland, the Maryland Supreme Court dismissed a state-court declaratory judgment action for failure to exhaust administrative remedies. And in Chamber of Commerce of the U.S., et al. v. Lierman, the 4th U.S. Circuit Court of Appeals struck down only the pass-through prohibition as content-based speech regulation.

The net effect was procedural. No court had reached the merits of the ITFA or constitutional challenges to the tax’s core structure until now.

The Tax Court’s Ruling

The Tax Court’s analysis addressed each of the petitioners’ claims and the comptroller’s defenses.

Internet Tax Freedom Act

The ITFA prohibits states from imposing “discriminatory taxes” on electronic commerce. A tax is discriminatory if it is “not generally imposed and legally collectible” on “similar property, goods, services, or information accomplished through other means.”

The central question was whether digital advertising services are “similar” to nondigital advertising services. The comptroller argued they are not, citing differences in business models and technical operations. The comptroller also introduced Technical Bulletin 59 (issued July 2025) defining taxable digital advertising as requiring both “programmatic” and “visual” attributes. Neither “programmatic” nor “visual” appears anywhere in the ITFA or the tax itself. The  terms were borrowed from the comptroller’s own hired expert and repackaged into guidance that the court found added “very little to the determination.” The court held hearings over four days in July 2025, receiving expert testimony from both parties on the meaning of “similar.”

The court, in its ruling, adopted a broad, purpose-based interpretation. It held that “the provision of digital advertising services is indistinguishable from the provision of non-digital advertising services; they are even more aligned than ‘similar.’” The purpose of both, the court found, “is the same . . . i.e., to make an impression on receivers of the advertising that leads to a sale of goods or other action.” The court further reasoned that the ITFA concerns transactions of electronic commerce, “not structures or business models or technical operations behind those transactions.”

This framing is critical. The comptroller proposed a granular test asking whether specific operational features (automation, data-driven targeting, real-time bidding) made digital advertising a “new industry.” The court rejected that framing entirely, holding instead that purpose is the “paramount consideration” and that “[o]ther considerations pale.” Digital advertising services get consumers off the proverbial couch and into the proverbial store, whether that store has a street address or an IP address.

The court was also persuaded by Performance Marketing Ass’n, Inc. v. Hamer, where the Illinois Supreme Court found a clear ITFA violation where online advertising was taxed but comparable nondigital advertising was not.

The court also dispatched the comptroller’s procedural and constitutional defenses. It held that the absence of a private right of action in the ITFA is irrelevant because the petitioners were using the federal law as a defense in a properly filed refund claim, not bringing a standalone enforcement action. It found the ITFA to be a “clear and manifest” expression of congressional intent sufficient for Supremacy Clause preemption under the U.S. Supreme Court’s decision in Wyeth v. Levine, (2009). And it rejected the Tenth Amendment anti-commandeering argument under high court’s decision Murphy v. Nat’l Collegiate Athletic Ass’n, (2018), finding Murphy inapposite because Congress was exercising plenary Commerce Clause authority.

Dormant Commerce Clause and Due Process

Applying the Supreme Court’s decision in Complete Auto Transit, Inc. v. Brady, (1977), the Tax Court found that the tax violated three of the four prongs. On fair apportionment, the tax fails external consistency because its graduated rate increases based on global revenues unrelated to Maryland activity. Two companies with identical $10 million in Maryland digital advertising revenue would pay vastly different tax amounts ($250,000 vs. $1million) solely based on differing global revenues. The more activity a company conducts outside of Maryland, the more tax it pays on Maryland activity – in other words, the opposite of fair apportionment.

The internal consistency problem is equally stark. If multiple states adopted Maryland’s sourcing framework but each used a different method from the mandatory hierarchy (device-level data in one state, authenticated profiles in another, IP-based inference in a third), the same company’s revenue could be allocated to well over 100% across all states. That is a textbook Commerce Clause violation under Wynne and Goldberg.

On discrimination, the court found that “unfair apportionment is de facto discrimination.” The tax’s $100 million global revenue threshold effectively ensures that only out-of-state companies are subject to the tax. On the Due Process Clause, the court held that the tax lacks a “rational relationship between the income attributed to the State and the intrastate values of the enterprise.”

What Happens Next

The comptroller’s office has 30 days from Aug. 14 to petition for judicial review in circuit court, and Comptroller Brooke Lierman said in a statement following the ruling that she “strongly disagree[s] with the decision” and “will continue to work with the Attorney General of Maryland in defending this important law.” Maryland Senate President Bill Ferguson described the ruling as “deeply disappointing.” Given the $535.5 million already collected and the political commitment to the Blueprint for Maryland’s Future, a multiyear appellate process through the circuit court and Maryland’s appellate courts is expected.

Commentary

The court’s broad, purpose-based reading of “similar” under the ITFA effectively forecloses the argument that digital advertising is a fundamentally new industry deserving of separate tax treatment. That reasoning could travel well beyond Maryland. The lesson is disarmingly simple: It’s not about form, it’s about function. If you tax the digital, do you also tax the similar non-digital at the same rate, on the same base, with the same collector? If not, the ITFA prohibits the levy. Parity is the passport.

The court left a roadmap, however, observing that the outcome “might have been different” had Maryland imposed “a similar tax with a threshold on non-digital advertising services” or “a uniform sales tax on all Maryland advertising irrespective of medium.” Washington state’s recent approach of taxing both digital and nondigital advertising under a general sales tax may represent the more sustainable model. Taxpayers should watch for replacement proposals during the Maryland General Assembly’s legislative session next year.

Taxpayers who have paid the tax can file protective refund claims for every open tax year beginning with 2022. Under Maryland regulations, the comptroller must act on a refund claim within six months. If no determination is issued, the taxpayer may elect to treat the claim as denied and appeal to the Maryland Tax Court.

Each tax year has its own limitations period. Waiting for a final, non-appealable decision risks forfeiting older years entirely. Taxpayers could continue filing returns and making payments under protest to avoid penalties and interest while preserving all objections.

In the meantime, businesses can consider every touchpoint as recordcraft. Retain sourcing methodologies, impression-to-revenue mapping, user-location data and vendor reconciliations. Document why higher-tier data within the mandatory sourcing hierarchy is unavailable and why the chosen fallback was reasonable. This documentation will be critical for calculating refund amounts and defending against audit adjustments while the appeal is pending.

Miles & Stockbridge’s tax lawyers are monitoring the fallout from the tax court ruling and can help guide businesses affected by the decision.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.