Maryland’s Misguided Digital Ad Tax: The Fight Continues in Trial Court

The Maryland Attorney General is appealing the Maryland Tax Court’s decision last month that struck down the state’s digital advertising tax. The first-of-its-kind law continues to draw national attention as other statehouses consider what the legal battle means for their own digital ad tax proposals. I covered the Tax Court ruling and similar nationwide legislation in a post last month.

It’s unfortunate, though perhaps not surprising, that the state has chosen to continue spending public funds on this litigation. I’m hopeful that the new venue – the state trial court – will affirm the Tax Court’s decision. A ruling that upholds the tax not only would harm Maryland consumers and the state's economy, but it would encourage more digital ad taxes across the nation. This risks reshaping the Internet’s advertising-supported model for the worse.

Ads play a central role in the modern Internet and broader economy, as they make up a significant portion of Internet traffic. Targeted advertising involves a set of voluntary exchanges that support the modern Web: businesses pay for targeted ads to reach consumers, and people share information with advertising companies in return for accessing websites without charge.

Taxes on digital advertising would mean fewer ads, as basic economics explains. In search for lost ad revenue, websites would likely create paywalls, turn to donations, or raise prices for their products, or combinations of these. All these costs would hit everyday working people hard, especially those with low incomes.

Many supporters of digital ad taxes have the picture backwards and instead see targeted advertising as a social ill. In Maryland, Senate President Bill Ferguson described basing the tax legislation on economist Paul Romer’s idea to curb targeted advertising by taxing it. Romer would instead like to see a subscription-driven Internet where website visitors pay to access content or donate to the website.

A general antipathy towards “big tech” started the push for digital ad taxes (which I discussed last month). As Maryland looked for ways to raise revenue amid massive education spending and budget challenges, legislators knew that taxes on companies like Meta and Google would likely be popular with the public. Similar tax legislation then began appearing in other statehouses trying to raise state revenue.

Fortunately, Maryland’s digital ad tax is on shaky grounds at best, a signal to other states that they may face similar challenges with their laws. In Maryland, the tax’s weak legal standing was clear from the start. Free State Foundation scholars predicted back in 2020 that the tax would not survive judicial scrutiny.

The Maryland Tax Court’s ruling last month determined that the tax violates the federal Internet Tax Freedom Act (ITFA) and the Constitution’s dormant Commerce Clause and Due Process Clause: under ITFA, the tax discriminates on digital advertising by exempting print and broadcast ad sales; it violates the dormant Commerce Clause by levying a local tax structure based on global revenue; and it violates the Fourteenth Amendment’s Due Process Clause by discriminating against out-of-state companies.

A reversal of the Maryland Tax Court ruling would begin to unwind the set of voluntary exchanges that support the modern Web. Taxes on digital advertising would make life more expensive for everyday consumers. I’m optimistic that the trial court will affirm the Tax Court’s decision and discourage other states from following the same path.

Congressional Reform Is More Urgent Than Ever as the USF Tax Rate Shoots to 42%

The tax that telecommunications service providers pay to fund the Universal Service Fund reached yet another all-time record high of 42% in the fourth quarter of 2026, up from 38.8% in the previous quarter.

The USF and its so-called “contribution factor” – effectively a tax, which funds the program – have long been the subject of bipartisan calls for reform. The tax funding mechanism is backwards and outdated. If the USF was created today, few would suggest the current structure – that traditional telecom services should subsidize broadband.

Traditional telecom services are a shrinking tax base that the USF’s funding structure dooms to an ever-climbing tax rate, unless Congress steps in. Case in point: the chart below illustrates how much greater the 42% tax rate is today than it was at its humble origins of 5.7% in the second quarter of 2000. 

 

The Universal Service Fund Working Group, a bicameral, bipartisan group of legislators was formed largely to address the shrinking tax base and has reportedly made progress drafting a major USF reform plan. I blogged recently about the draft legislation’s timeline (read here).

The hard part for the working group is the point at which broad consensus on the USF breaks down – what’s the proper alternative to this status quo? Considering today's technological and marketplace realities, what services should the USF fund anyway, and how should the subsidies be funded? Last year, Free State Foundation scholars submitted comments to the USF Working Group explaining just that: get rid of wasteful spending by ending the fund’s redundant High-Cost program; replace the Lifeline program with a voucher system to be used by qualifying low-income persons; and fund the USF via congressional appropriations, among other fixes.

How high does the USF tax need to climb before Congress finally reforms the fund? I remain hopeful that we will see a draft legislative plan by the end of this year.

Price Regulation Is Not the Answer for Broadband

By Randolph May and Joseph Kennedy

 

In a recent blog posting on the Benton Institute’s Digital Beat, Christopher Ali, the Pioneers Chair in Telecommunications at Penn State University, called for consideration of rate regulation for broadband providers. His main argument is that some households still have difficulty paying their Internet bill. That may be true for some in the short-term. However, the best way to ensure lower prices and greater innovation for the most consumers over the long-term remains continued promotion of increased competition with market-determined prices.

There is considerable evidence showing a steady pattern of increasingly faster speeds and lower prices per megabyte per second over the last few years. In other words, on average, consumers are paying less for more broadband capacity. Rate regulation almost certainly would reverse this.

Long periods of telecommunication history in the past were characterized by stagnant prices and low innovation because regulators treated the underlying transmission facilities as fixed assets that could only handle a limited amount of traffic. During this earlier monopolistic era, regulators aimed to guarantee providers a fixed rate of return on their investments and discouraged competition from new technologies.

As Ted Hearn points out in Policyband, Professor Ali does not acknowledge the large number of current market promotions reducing prices. Comcast, for example, is offering 300 Mbps for $40 a month and guaranteeing the price for five years. Mediacom is selling a broadband-mobile bundle, guaranteed for two years. Both are significantly lower than the $78 median monthly bill that Ali cites. It may be that the average user prefers to pay more for more capacity rather than lower fees for less bandwidth. However, federal programs and state universal service subsidies specifically target low-income consumers that may have difficulty paying their bills, along with offerings by individual providers targeting low-income consumers.

Professor Ali also does not mention the growing broadband competition from satellite constellations such as Elon Musk’s Starlink. It and other companies are aggressively targeting new customers with their high-speed broadband offerings, especially those in remote areas where fiber installation is extremely expensive. Price competition from satellites recently helped the National Telecommunications and Information Administration lower the overall cost of its Broadband, Equity, and Access Program by $21 billion. Much of these savings will be poured back into the BEAD program’s efforts to extend broadband to the remaining unserved locations in the country.

As Professor Ali points out, the public debate on price regulation has been more or less settled, at least for now. Over the last several decades, a number of markets thought to be natural monopolies, including those involving freight trains, airlines, electricity transmission, and Ma Bell-era communications facilities have faced fewer regulations and greater competition. Instead of low-risk regulators limiting new sources of competition and innovation, consumers now benefit from new market entrants offering new products and lower prices.

This is certainly not the time to renew efforts at rate regulation as the broadband marketplace becomes ever more competitive. 

NTIA Release of More BEAD Money Properly Targets Deployment

For several months the telecommunications world has speculated on the future of the Broadband, Equity, and Access Deployment Program (BEAD). Congress created the program as part of the Infrastructure Investment and Jobs Act with the purpose of extending broadband coverage to all underserved and unserved communities. Program changes by the Trump Administration reduced expected spending by $21 billion. Since then, the broadband community has been waiting to see whether this money would be spent and for what purposes. Now, commendably, it is good to see that the first guidance on additional spending goes right to the heart of BEAD’s purpose.

On September 3, NTIA issued guidance regarding how some of the money will be allocated. Briefly, the funds will be available for a second round of proposals to extend deployment of broadband to all Americans. This is the proper focus.

 

Although the BEAD program was supposed to allocate enough funds to accomplish this goal several months ago, NTIA anticipates three sources of new locations that still require funding. The first are areas that remain unserved due to defaults in other federal and/or state programs. The second are projects that suffered from misreporting by providers. The final source stems from changes to the Federal Communication Commission’s broadband DATA maps since completion of the final proposals. These locations either suffered from misfortune caused by others or, in the case of the DATA maps, were assumed not to exist.

In its Supplemental Deployment Policy Notice NTIA spells out new procedures that Eligible Entities (States, Territories, and the District of Columbia) can follow to request part of the $21 billion to fill in these remaining unserved areas, hopefully completing BEAD’s purpose: to extend broadband service to all areas of the country. NTIA's new Policy Notice builds on BEAD’s original Notice of Funding Opportunity.

Eligible Entities are expected to provide connectivity to all unserved locations within the constraints of the additional funds. However, additional funds are available in extraordinary circumstances.

It is reassuring that the initial plans for spending the Benefit of the Bargain Savings (the $21 billion) will deal directly with BEAD’s main purpose: completing the spread of broadband to all parts of the country. There may need to be further guidance, however, on how many areas NTIA believes still need to be funded or how much it will cost. Some approved projects have already experienced defaults. Inflation, difficulty obtaining state and local permits, and time constraints will likely result in others.

The procedure for allocating additional funding builds on the original round. NTIA will review the DATA maps to ensure their accuracy in locating additional locations to be served. NTIA will then determine an upper limit of funding to serve these new locations. This amount will be based on the average cost of serving a location and the additional unserved locations. NTIA states that other uses of BEAD will be addressed in subsequent guidance.

EchoStar: Chutzpah in Communications Land

 A classic example used to explain the meaning of the Yiddish term "chutzpah" is the joke about a boy who murders his parents and then begs the judge for mercy because he is an orphan.

 

EchoStar hasn't killed anyone. But its ploy to claim payments from the trust fund the FCC required EchoStar to establish as a condition of its approval of the transfer of EchoStar's spectrum licenses to AT&T and SpaceX certainly qualifies as one of the most egregious acts of chutzpah in Communications Land.

 

The background facts are well-known. When the FCC's Wireless Telecommunications Bureau (WTB) approved EchoStar’s sale of its licenses on May 12, 2026, for tens of billions of dollars, it required EchoStar to set up a trust fund to help pay tower companies and others that helped construct EchoStar's 5G network. While EchoStar was required to build the network as a condition on its licenses, it refused to pay the vendor companies that actually did so.

 

EchoStar has now told a federal bankruptcy court that this fund can be used to pay a loan one EchoStar subsidiary supposedly made to another, a claim so large, according to the WTB, it threatens to "swallow the fund."

 

In a July 30, 2026, order, the WTB firmly rejected EchoStar's act of chutzpah: "We disagree, and clarify what should be obvious – that the fund cannot be used to pay companies that did not build the network. And to ensure that that the purpose of the fund is not perverted, we also modify the fund’s terms to explicitly exclude from payment any claims of EchoStar or its subsidiaries."

 

Never one to give up on a far-fetched gambit – especially one trying to "swallow a fund" meant for the benefit of others – EchoStar has now asked the full Commission, in an August 30 Application for Review, to reverse the Bureau's order. EchoStar contends that, because the agency's order establishing the trust does not explicitly limit the payouts to claims of third parties, it's entitled to take funds from the trust with one hand that it supplied with the other.

 

The Wireless Telecommunications Bureau's July 30 order, to ensure its intent in creating the trust fund is carried out, modifies the definition of a fund claim to exclude any claims on behalf of EchoStar or its subsidiaries or affiliates, or any assignee thereof. The Bureau's July 30 order explains what almost certainly was evident to all when the FCC required that the trust fund be established as a condition of its approval of the transfer of EchoStar's spectrum licenses:

 

"The purpose of requiring EchoStar to create the Fund was to ensure that some of the tens of billions of dollars EchoStar is receiving for its wireless licenses be used to pay those who built the 5G network that EchoStar promised and was required to build as a condition on holding those licenses. That purpose is not realized if EchoStar pays the money to itself (directly or indirectly), or uses it to pay other of its debts or those of its subsidiaries or affiliates."

 

In essence, EchoStar's main argument seems to be that the Administrative Procedure Act prevents the Bureau from clarifying its July 30 order to make crystal-clear, if need be, that the lack of an explicit limitation in the agency's original order creating the trust fund did not mean that EchoStar itself would be able to claim payments from the very trust it funded. I don't think the APA does any such thing.

 

If EchoStar's gambit succeeds, not only would the specific tower and other 5G infrastructure builders for whose benefit the trust fund was established be injured, but, as importantly, the prospect for future network build-outs will be diminished as a result of the lack of confidence that contracts will be honored and that the rule of law will prevail.  

 

I forget what happened to the orphan who, in a show of chutzpah, pleaded with the judge for mercy after killing his parents. But you don't need to be an expert in administrative law or in Yiddish to suspect that, in this instance, EchoStar's exercise of chutzpah in Communications Land will be to no avail.