Maryland digital ad tax ruling: What businesses should know

• The 4th circuit ruling doesn’t kill Maryland’s digital ad tax; it ruled a provision of the law was unconstitutional.
• The decision could shape future taxes on digital activity.
• Businesses should proactively track tax legislation and rulings related to the goods and services they sell.

Maryland’s first-in-nation digital advertising tax (DAT) took effect on January 1, 2022. The tax applies to any entity with at least $100 million in global ad tax revenue and $1 million in annual gross revenues from digital advertising services in Maryland. There are four digital ad tax rates: 2.5%, 5%, 7.5%, and 10%; the greater an entity’s global annual gross revenue, the higher the tax rate they pay.

Businesses subject to the DAT are required to file an annual digital advertising gross revenues (DAGR) tax return, plus quarterly estimated returns.

The Comptroller of Maryland didn’t issue technical guidance for the digital ad tax until July 11, 2025. As KPMG observes, Technical Bulletin No. 59 “focuses on defining the characteristics that must be present for digital advertising services to be subject to the tax. Specifically, the Comptroller guidance states that digital advertising services must be both ‘programmatic’ and ‘conveyed visually.’” It’s worth a read.

The bulletin also emphasizes that the digital ad tax is levied on the provider of the services. Entities cannot pass the cost of the tax to their customers by any means, including a separate fee, surcharge, or line item. According to the bulletin, “the entire purchase price, including any increases to the purchase price to account for or recover the DAGR tax, constitutes gross revenues subject to the tax.”

Maryland may need to update its guidance. On August 15, the circuit court found this pass-through provision to violate the First Amendment, reversing a 2024 U.S. District Court decision.

According to the federal appeals court’s decision, “the pass-through provision of Maryland’s digital advertising tax is unconstitutional in all of its applications.” The opinion explains that “states may not forbid regulated parties to talk about their regulations unless they withstand First Amendment scrutiny. Maryland’s pass-through provision does not.”

Maryland included the pass-through provision so companies that are subject to the tax would bear the economic and legal responsibility for the tax. The court found the fact that invoices may not contain separate fees, surcharges, or line items to be “a speech ban.” Furthermore, as the opinion points out, companies can pass the cost of the tax on to consumers by other means, like raising prices or adding fees.

“The state attempted to block businesses from passing the tax on to their customers, but wrote a law that, if read literally, only prohibited some ways of passing the tax on,” says Scott Peterson, VP of Government Relations at Avalara. “The law was in trouble the moment the District Court decided the law selected some forms of speech over other forms.”

The federal appeals court sent the case back to the District Court that allowed the law to stand. While that plays out, Maryland is defending other aspects of its law. As Samuel Handwerger of the University of Maryland explains, in addition to the First Amendment, Maryland’s digital ad tax is accused of violating:

• The Internet Tax Freedom Act — for discriminating against digital services.
• The Commerce Clause — for targeting out-of-state companies based on global revenue.
• Due Process — for its complex apportionment schemes.
• The Foreign Commerce Clause — for potentially interfering with international trade negotiations.

The circuit court ruling doesn’t prevent Maryland from enforcing its digital advertising tax; the court decided “the universal injunction” falls “outside the bounds of a federal court’s equitable authority.” And since the plaintiffs are associations with many members, it’s “hard to tell how far an injunction can sweep to give plaintiffs ‘complete relief.’”

“These complex questions, we think, should be answered by the District Court in the first instance,” the opinion concludes. “So we will remand the case to the District Court with instructions to consider what remedy is appropriate in light of our decision.” The District Court will determine the next steps for Maryland and the businesses subject to Maryland’s digital ad tax.

The August 15 ruling clarifies what is and isn’t acceptable with respect to the First Amendment. Court decisions that are still pending should do the same for the Commerce Clause, Due Process, and Internet Tax Freedom Act.

States have been watching the Maryland digital advertising tax saga unfold with interest. Several, including New York, have introduced digital ad tax legislation of their own. But most states are hesitant to enact a digital advertising tax with the legality of Maryland’s DAT in question.  

Washington state is not: It will start taxing digital advertising and several other technology services on October 1, 2025. The Washington tax is not the same as Maryland’s; it’s a sales tax rather than a gross receipts tax. Nevertheless, according to McDermott Will & Shulte’s Inside SALT blog, “a legal challenge is all but guaranteed.”

Avalara can help businesses comply with Washington state’s new sales tax on digital ads and IT services. We can also help businesses collect and remit the Maryland sales tax on data and information technology services that came into effect on July 1, 2025.

Learn about automating sales and use tax compliance with Avalara.