Ad Infinitum: Court Invalidates Maryland Digital Ad Tax as Latest State Overreach

The Maryland Tax Court on August 14, 2026, invalidated Maryland's first-in-the-nation digital advertising gross revenues tax in three companion decisions – Apple Inc. v. Comptroller, No. 23-DA-OO-0456, Google LLC v. Comptroller, No. 23-DA-OO-0649, and Peacock TV, LLC v. Comptroller, No. 23-DA-OO-0654 (Md. Tax Ct. Aug. 14, 2026) – finding the tax violated federal law and multiple provisions of the U.S. Constitution.

The court held that digital advertising services are "similar" to traditional advertising under the Internet Tax Freedom Act (ITFA), making Maryland's tax a prohibited "discriminatory tax" on electronic commerce.

The rulings are notable because they could provide a constitutional and statutory road map for challenging similar digital advertising and other taxes that other states have enacted or are considering in ongoing attempts to tax the digital economy.

Background: Maryland's Digital Advertising Tax

In 2021, Maryland became the first state to enact a tax specifically targeting digital advertising services. The Digital Advertising Gross Revenues Tax imposed graduated rates ranging from 2.5 percent to 10 percent on annual gross revenues derived from digital advertising services in Maryland, with rates tied to a company's global annual gross revenues. Only companies with at least $100 million in global annual gross revenues were subject to the tax (Md. Code Ann., Tax-Gen. §§ 7.5-101–7.5-301 (2021)).

Major technology and media companies – including Apple, Google, Amazon, Comcast (Peacock TV) and Verizon – challenged the tax on multiple grounds. After years of litigation, the Maryland Tax Court issued definitive rulings on August 14, 2026, granting summary judgment in the Apple, Google and Peacock cases and ordering refunds of taxes paid.

The ITFA: A Sleeping Giant?

Enacted in 1998 as a temporary three-year "moratorium," the ITFA prohibits state and local governments from imposing "discriminatory taxes" on electronic commerce – taxes imposed on internet transactions but not on "similar" transactions accomplished through other means (ITFA, Pub. L. No. 105-277, Tit. XI, 112 Stat. 2681 (1998), codified at 47 U.S.C. § 151 note). The U.S. Congress extended the moratorium repeatedly – in 2001, 2004, 2007, 2014 and 2015 – before finally making it permanent in 2016 (Trade Facilitation and Trade Enforcement Act of 2015, Pub. L. No. 114-125, Tit. IX, § 922, 130 Stat. 281 (2016)).

For most of its existence, the ITFA has been largely untested in litigation. The first major taxpayer victory came in Performance Marketing Ass'n, Inc. v. Hamer, 998 N.E.2d 54 (Ill. 2013), where the Illinois Supreme Court struck down a use tax collection obligation targeting retailers using online "performance marketing" (affiliate advertising with tracking codes) but not to retailers using similar tracking codes in print or broadcast advertising. Because the online and offline services were the same, the court found a clear ITFA violation: Illinois had "singl[ed] out retailers with Internet performance marketing arrangements" while imposing no comparable obligation on offline advertisers (Id. at 58–59).

But subsequent courts narrowed the statute's promise. In Labell v. City of Chicago, 147 N.E.3d 732 (Ill. App. Ct. 2019), the court upheld Chicago's amusement tax on streaming services, finding streaming not "similar" to automatic amusement devices because it is consumed privately at home on patron-owned devices rather than publicly on business-owned equipment. In Gartner, Inc. v. Dep't of Revenue, 455 P.3d 1179 (Wash. Ct. App. 2020), the court likewise held that access to a software-driven digital research library was not "similar" to human-delivered research services. Together, the decisions treated digital technology as transforming an underlying traditional service, not merely a means for delivering a service, leaving taxpayers without viable offline analogues.

The Maryland decisions may mark a turning point. The Maryland court has applied the ITFA's "similarity" analysis to invalidate a major revenue-raising tax – not merely a collection obligation or a narrow statutory defect – and has done so with exhaustive factual findings that digital advertising is fundamentally "similar" to traditional advertising for ITFA purposes. If this holding survives appeal, it could breathe new life into a statute that has been largely underutilized for challenging state taxation of electronic commerce.

The Maryland Tax Court's August 14 Decisions

The court invalidated the tax on four independent grounds, any one of which would have been sufficient on its own to strike down the statute.

ITFA Preemption

The ITFA prohibits state and local governments from imposing "discriminatory taxes" on electronic commerce. A tax is discriminatory if it is imposed on electronic commerce transactions but not on "similar" transactions accomplished through other means (47 U.S.C. § 151 note § 1105(2)(A)(i)).

Maryland argued that digital advertising is fundamentally different from traditional advertising – more targeted, data-driven and technologically sophisticated. The court rejected this argument, finding an "overwhelming litany of attributes and characteristics that are found to be nearly, if not actually, identical between digital advertising services and non-digital advertising services" (Apple, slip op. at 18). Because Maryland taxes digital advertising but not traditional advertising – such as print, broadcast, billboard or direct mail advertising – the court found the tax constitutes a prohibited discriminatory tax under the ITFA (Id. at 22–23).

Dormant Commerce Clause: Fair Apportionment and Discrimination

Under the four-part test articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), a state tax affecting interstate commerce must, among other requirements, be fairly apportioned to avoid taxing more than the state's fair share of the activity and  not discriminate against interstate commerce.

The court found Maryland's tax failed both of these prongs. On fair apportionment, the tax's structure – which determines tax rates based on a company's global annual gross revenues while taxing only Maryland-sourced digital advertising – means that two companies with identical digital advertising revenues in Maryland could pay vastly different effective tax rates based solely on the magnitude of their operations elsewhere. A company with $200 million in global revenues pays a 2.5 percent rate, while a company with $15 billion in global revenue pays 10 percent. This lack of "external consistency" violates the Commerce Clause (Apple, slip op. at 24–25; see also Goldberg v. Sweet, 488 U.S. 252, 262 (1989)).

On discrimination, the $100 million global revenue threshold and graduated rate structure inherently favor smaller, often in-state businesses over large national and international companies that engage in interstate commerce.

Due Process: Extraterritorial Reach

The Due Process Clause prohibits a state from taxing value earned outside its borders. Here, because Maryland's tax rate depends on a company's global revenues – revenues earned in every other state and country – it effectively reaches beyond Maryland's borders to penalize economic activity that has no connection to Maryland (Apple, slip op. at 29–30; see also Comptroller of Treasury of Md. v. Wynne, 575 U.S. 542 (2015)).

First Amendment: Vague Press Exemption (Peacock Decision)

In the Peacock decision, the court addressed an additional constitutional defect: The tax's news media exemption violates the First Amendment. The statute exempts entities that "primarily" provide "news" from the tax but fails to define either term. The court found that applying this exemption necessarily requires content-based scrutiny of whether a platform's content qualifies as "news," implicating core First Amendment concerns. Citing U.S. Supreme Court precedent, the court held that "vagueness in a statute that deals with activities of the press is usually fatal when measured against the First Amendment" (Peacock, slip op. at 33–34; see also Arkansas Writers' Project, Inc. v. Ragland, 481 U.S. 221 (1987)).

Implications: A Nationwide Road Map for Challenging Taxes on the Digital Economy

The Maryland decisions will almost certainly be appealed further. However, their potential significance reaches far beyond the state's borders. The court's detailed factual findings – particularly its conclusion that digital advertising is "similar" to traditional advertising under the ITFA – establish a template for challenging any state tax that singles out digital advertising for taxation while leaving traditional advertising untaxed.

The Key Vulnerability: ITFA Preemption

For companies challenging digital advertising and similar taxes, the ITFA could prove to be the most powerful weapon. Once a court finds that digital advertising or another digital service is "similar" to its traditional offline counterpart – as the Maryland court did in exhaustive detail (Apple, slip op. at 11–23) – any state tax that applies only to the digital version of that service is federally preempted. This is a categorical bar: The state cannot cure the defect by adjusting rates, thresholds or exemptions. The only solution would be to tax the traditional service equally (see also Performance Mktg. Ass'n v. Hamer, 998 N.E.2d 54 (Ill. 2013) (finding ITFA violation where online advertising was taxed but print and broadcast advertising was not)). Certainly, in the advertising context – but potentially in many other service categories as well – such an approach would face its own political and practical obstacles.

Commerce Clause and Due Process: Structural Design Flaws

The Maryland rulings also expose fatal structural defects common to many proposed digital advertising taxes:

• Global Revenue Thresholds. Taxes that apply only to companies with revenues exceeding a threshold (e.g., $100 million globally) discriminate against interstate commerce and raise fair apportionment concerns because they use out-of-state activity to determine in-state tax liability.
• Graduated Rates Tied to Global Revenues. Rate structures that increase based on worldwide revenues, not just in-state revenues, effectively tax activity beyond the state's borders, violating due process and external consistency requirements.
• Content-Based Exemptions. Carve-outs, such as for "news" or "journalism," require government officials to evaluate content, raising First Amendment questions. If a statute does not clearly define these terms, vagueness compounds the constitutional defect.

The Broader Landscape: More Overreach, More Vulnerability

Maryland is not alone. States across the country are experimenting with ways to extract revenue from digital platforms, and many share the same constitutional and statutory defects that doomed Maryland's tax. The mechanisms vary, but the overreach is consistent: global revenue thresholds, per-user levies and content-based distinctions that extend state taxing authority well beyond state borders.

Targeted Advertising Taxes – and Beyond

The most obviously vulnerable measures are those that, like Maryland's, single out digital or "targeted" advertising for taxation while leaving traditional advertising untaxed. Illinois enacted a 10 percent gross receipts tax on targeted advertising services (Targeted Advertising Services Tax Act, Pub. Act 104-0468, effective Jan. 1 2027). Utah enacted a nearly identical 4.7 percent tax, with the same structural defects: a $100 million global revenue threshold and separate in-state threshold (Utah Code Ann. §§ 59-35-201 to 59-35-203 (S.B. 287, effective Jan. 1, 2027)). These taxes walk directly into the Maryland court's ITFA holding. If digital advertising is "similar" to traditional advertising – and the Maryland court found no meaningful distinction between the two – then any tax that applies only to digital advertising is federally preempted.

The Maryland decisions present an interesting opportunity for taxpayers facing taxes on services rendered in the digital economy when the analogous offline services are not subject to tax. For decades, states have imposed sales and use tax on a variety of online services, and they have generally avoided serious challenges on ITFA grounds. The Apple, Google and Peacock decisions represent the first real judicial test of ITFA's power to restrict state attempts to discriminate against online services and could provide a road map for taxpayers looking for opportunities to level the playing field in the taxation of services far beyond advertising.

Social Media and Data Collection Taxes

Other states are targeting social media platforms and data collection rather than advertising transactions, but these measures suffer from their own structural problems. Chicago imposes a per-consumer tax on social media platforms (Chicago, Ill., Mun. Code §§ 4-156-1000 to 4-156-1070 (effective Jan. 1, 2026)). Minnesota has proposed a tiered per-consumer tax on social media data collection ranging from 10 cents to 50 cents per user (Minn. H.F. 5055 § 295.90). Mississippi has proposed a flat $7 per active user quarterly tax (Miss. H.B. 1813). Maryland, undeterred by the challenges to its advertising tax, has introduced a new Digital Social Media Gross Revenues Tax (Md. H.B. 468 (2026)). These per-user structures raise serious Commerce Clause and Due Process concerns: Platforms cannot geographically segregate user bases, and tiered fee structures that escalate based on total user counts effectively penalize companies for their national scale – precisely the extraterritorial overreach the Maryland court condemned (see Apple, slip op. at 24–26).

"Fees" and Other Attempted Workarounds

Some states are attempting to dodge ITFA by labeling their revenue extractions as "fees" or "registration charges" rather than taxes. Colorado tried this approach with enterprise "fees" on platform transactions, and the governor vetoed the bill, citing constitutional and policy concerns (Colo. H.B. 26-1418, vetoed). New Jersey imposes tiered "registration fees" on data brokers based on the number of consumers whose data they handle (N.J. A5328). Kentucky added "data brokering services" to its sales tax base (Ky. H.B. 757). Whether relabeling a tax as a "fee" insulates it from ITFA is untested, but these measures remain exposed to Commerce Clause challenges wherever fee structures incorporate thresholds tied to out-of-state activity. Utah's excise tax on adult content platforms – conditioning tax liability on content classifications (Utah S.B. 73) – raises First Amendment concerns similar to those identified in the Peacock decision (see Peacock, slip op. at 33–34).

Insights

For companies that paid Maryland's digital advertising tax from 2022 forward, the immediate action item is clear: File refund claims if you have not already done so. The Maryland Tax Court granted summary judgment to taxpayers and ordered refunds. Maryland will appeal, but the court's decision to invalidate the tax on four independent grounds – ITFA preemption, Commerce Clause violations, Due Process violations and First Amendment defects – creates a substantial hurdle for the state to overcome on appeal.

More broadly, companies operating in states that have enacted or are considering digital advertising taxes, social media taxes, data collection levies or similar revenue measures targeting transactions in the digital economy should consider the following:

• Evaluate ITFA Exposure. The Maryland court's holding that digital advertising is "similar" to traditional advertising under the ITFA is a categorical finding. Any state tax that applies to digital advertising while leaving traditional print, broadcast, billboard or direct mail advertising untaxed is now vulnerable to federal preemption; more broadly, any tax that applies to services delivered digitally but not to "similar" services rendered offline warrants a review. This is not a matter of adjusting rates or thresholds – the defect is structural and cannot be cured without taxing the traditional services equally.
• Identify Structural Design Flaws. Beyond ITFA, the Maryland decisions expose constitutional vulnerabilities that apply to a wide range of digital platform taxes. Global revenue thresholds that determine whether a tax applies – or that set tax rates based on worldwide revenues – violate Commerce Clause fair apportionment requirements and Due Process limits on extraterritorial taxation. Content-based exemptions for "news" or "journalism" raise First Amendment concerns, particularly where statutory terms are undefined.
• Preserve Refund Rights. Where companies are required to pay taxes they intend to challenge, pay under protest and file protective refund claims to preserve the right to recover amounts paid if the tax is ultimately invalidated. Statute of limitations periods vary by state, and companies should consult counsel to ensure claims are timely filed.
• Watch for Workarounds – and Their Vulnerabilities. States may attempt to recharacterize taxes as "fees," "registration charges" or "enterprise" revenue mechanisms to avoid ITFA preemption. Whether such relabeling will succeed is untested, and these alternative structures often incorporate the same global thresholds and extraterritorial reach that expose them to Commerce Clause challenges. Companies should evaluate new state measures carefully and consider early challenges where appropriate.
• Engage in the Legislative Process. The Maryland rulings provide persuasive authority for opposing proposed digital advertising taxes in other states. Early legislative engagement – armed with the Maryland court's detailed factual findings and legal conclusions – may be more efficient than post-enactment litigation.

Holland & Knight will continue to monitor developments in Maryland, other states and any federal legislative responses. For more information, or to discuss how these developments may affect your business, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.