Digital Tax Debacle

When Maryland lawmakers celebrated overriding Gov. Larry Hogan's veto in February 2021 to enact the nation's first digital advertising tax, they envisioned a groundbreaking revenue stream that would generate up to $250 million annually for education reforms.

Four years later, “that pioneering spirit has turned into a cautionary tale of unintended consequences, endless litigation and a tax that may ultimately cost the state far more than it ever collected,” says accounting lecturer Samuel Handwerger at the University of Maryland’s Robert H. Smith School of Business, upon a federal appeals court ruling the tax as unconstitutional because it blocks big tech from telling customers about the tax.

The ambitious tax, targeting tech giants like Google, Meta and Apple with rates up to 10% on their digital advertising revenues in Maryland, “has become a legal quagmire that exemplifies how good intentions can collide with constitutional realities,” says Handwerger, who also is a faculty advisor for UMD’s Financial Wellness Center and university-affiliated TerpTax and Justice for Fraud Victims. “What was supposed to be a model for other states has instead become a warning about the perils of rushing to tax the digital economy without fully considering the legal and practical ramifications.”

Promise vs. Reality
“The numbers tell a sobering story,” Handwerger says. Maryland projected the tax would raise $250 million annually, but actual collections have fallen short, at approximately $90 million a year. “Even worse for the state's finances,” he adds, as the $107 million collected to date could have to be refunded.

Web of Constitutional Red Flags
As the August 15, 2025 appeals court ruling sends the case back to U.S. District Judge Lydia Kay Griggsby with instructions to consider an appropriate remedy, the tax has been challenged in multiple legal venues, including Maryland Tax Court, where the case is ongoing. Handwerger says the array of legal challenges “read like a constitutional law textbook.” The tax, he adds, is simultaneously accused of violating:

• The First Amendment—for prohibiting companies from telling customers about the tax.
• 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.

While Maryland's actual collections have fallen short of expectations, even those sums may need to be refunded with interest if courts rule against the state.

Silence That Spoke Volumes
Perhaps the most controversial aspect of the tax was its prohibition on transparency, Handwerger says, noting that companies were required to pay the tax but forbidden from telling customers about it. He further points to Circuit Judge Julius Richardson writing in the recent appeals court decision, "Companies that make money advertising on the internet must not only pay the tax but avoid telling their customers how it affects pricing: No line items, no surcharges, no fees. If companies pass on the cost of the tax, they must do so in silence."

The court held that this provision violated the First Amendment, striking down the disclosure ban as unconstitutional in all applications.

The Wynne Precedent
In Comptroller v. Wynne (2015), the U.S. Supreme Court struck down Maryland's income tax structure for violating the Commerce Clause, leading to massive refunds. Initially, those refunds would have been calculated with the state’s then-standard 13% interest rate—a burden that threatened local finances. Anticipating the outcome, the legislature in 2014 passed the Budget Reconciliation and Financing Act to retroactively reduce the interest rate to about 3.25% for Wynne refunds only. Courts ultimately upheld this special reduction.

This history matters because if Maryland loses the digital ad tax cases, refund claims will likely accrue interest at the current statutory rate of 9% per year (prime plus 3% with a floor of 9%), Handwerger says. “Unless the legislature again intervenes to reduce the rate, the interest obligation could significantly compound the state’s financial exposure.”

Education Reform Funding
The revenues from the digital advertising tax were earmarked for Maryland's ambitious education reform program, the Blueprint for Maryland's Future. “The program's rising costs make the tax’s legal troubles especially consequential for students and teachers,” Handwerger says. “Even if the tax survives, it may fall far short of providing the reliable revenue stream lawmakers envisioned.”

Cautionary Tale for Other States
Maryland's troubles have “sent shockwaves” through other state capitals that were considering similar taxes, Handwerger says. Since enactment, at least 13 other states—including California, Rhode Island, Nebraska, Louisiana and Virginia—have proposed digital advertising taxes. None have enacted them, “suggesting lawmakers are watching Maryland’s litigation closely and learning from its mistakes,” he adds.

Related Cases
The legal challenges are advancing on multiple fronts with potentially devastating consequences:

• Apple Inc. v. Comptroller of Maryland—The Maryland Tax Court has allowed Apple’s refund claim to proceed, with a ruling expected in late 2025.
• Federal Constitutional Challenge—Business groups including the U.S. Chamber of Commerce are challenging the law in federal court on First Amendment, Commerce Clause and Internet Tax Freedom Act grounds.
• Additional Corporate Cases—More than a dozen other refund claims are pending outcomes in key test cases.

The longer litigation drags on, the more interest accrues on potential refunds, increasing the fiscal risk to the state.

Bottom Line
What began as an innovative attempt to capture revenue from the digital economy has morphed into a potential fiscal catastrophe, Handwerger says. “Maryland may end up paying out more in refunds and interest than it ever collected, while simultaneously damaging its reputation as a business-friendly state and undermining U.S. diplomatic efforts on digital taxation.”

The digital advertising tax saga serves as a stark reminder, Handwerger concludes: “In the rush to tax new technologies and business models, states must weigh not only potential revenues but also the constitutional, practical and diplomatic consequences. For Maryland, the cost of learning this lesson may ultimately be measured not just in legal fees and refunds, but in missed opportunities for education funding.”