A Maryland state tax court has nullified the state’s digital advertising tax and instructed the repayment of collected taxes from major tech companies. The court deemed the tax contravenes the federal Internet Tax Freedom Act, along with the First Amendment and the commerce and due process clauses of the U.S. Constitution.

This case has been observed by other states contemplating similar taxes on online advertising. Maryland had anticipated generating $250 million annually from the tax, approved in 2021, to finance significant K-12 education reforms.

On Friday, the tax court ordered Maryland to refund tax money collected from companies like Apple, Google, and Peacock TV. The tax targeted revenue from digital advertisements shown in Maryland for companies with global annual gross revenues exceeding $100 million. Companies were taxed at a 2.5% rate, escalating to 10% for those earning $15 billion or more globally.

Proponents argued the necessity of updating Maryland’s tax system to align with evolving advertisement practices. Attorneys for tech giants such as Meta and Amazon opposed the law, arguing it unfairly targeted them. Previously, the 4th U.S. Circuit Court of Appeals found the law partly unconstitutional as it prevented companies from informing customers about the tax, thus infringing on free speech rights.

Maryland Senate President Bill Ferguson and House Speaker Joseline Pena-Melnyk expressed disagreement with the ruling and expect ongoing legal proceedings. They emphasized the commitment to maintaining a fair and sustainable tax system that aligns with the modern economy.

The tax court highlighted that Congress, not state legislature, regulates interstate commerce, indicating the tax’s inappropriate reliance on global revenues. The federal Internet Tax Freedom Act prohibits e-commerce taxation unless similar services are taxed, and currently, digital advertising is treated comparably to traditional ads like print or billboard, preventing taxation.