Maryland’s Digital Ad Tax Struck Down: The Fight Is Likely to Continue

Last week, the Maryland Tax Court struck down the state’s controversial 2020 digital advertising tax on grounds that it violates the Constitution and the federal Internet Tax Freedom Act (ITFA). The ruling on the first-of-its-kind law drew national attention as tech companies, advertisers, and other statehouses watched to see what it might mean for digital product taxes nationwide.

While mounting legal defeats signal trouble for various states’ attempts at digital ad taxes, it's likely states will keep looking for ways to tax and regulate tech. The impetus stems from two key drivers in our current political environment – governments’ persistent urge to tax their way out of their over-spending habits and a growing public antipathy towards large technology companies.

The tax, passed in 2020, applied to companies that sell digital advertising in Maryland, with progressive tax rates from 2.5% to 10% based on company revenue. The Maryland Tax Court ruled on August 14 in favor of challenges filed by Apple, Google, and streaming service Peacock TV. The court – an administrative quasi-judicial agency whose decisions are binding – also ordered the state to refund over half a billion dollars ($536million) it collected since the tax took effect.

The tax court determined that the law violated the Constitution’s dormant Commerce Clause and Due Process Clause as well as ITFA. The tax violates the First Amendment by discriminating against digital advertising and exempting print and broadcast ad sales. The weak legal standing was clear from the start. Free State Foundation scholars predicted back in 2020 that the tax would not survive judicial scrutiny. This ruling also follows last year’s decision in federal appellate court that the tax’s pass-through provision – which prohibited companies from directly passing the tax costs to consumers – violated the First Amendment.

Comptroller of Maryland Brooke Lierman, in response to last week’s ruling, said that she and the Attorney General of Maryland would continue to defend the tax law. This could include possible appeals to the state trial court, where the law could get stuck for a while. Until a final outcome, the state will continue holding the taxes already collected.

These defeats in state tax and federal appellate courts (hopefully) signal trouble for digital ad taxes in other states. Illinois, Utah, and Washington have also passed digital ad taxes. Utah, apparently sensing legal trouble brewing in Maryland, crafted its 2026 digital ad tax law to skirt ITFA violations by avoiding the phrase “digital advertising.” Digital ad taxes are part of a wider push across states to tax digital goods and services. In 2026 alone, 22 states considered proposals to tax digital ad sales, with 12 bills enacted, according to a MultiState analysis.

This growth in digital tax proposals is happening as many states explore ways to tax their way out of their spending problems. Proponents argue they just want to raise revenue and modernize the tax code by taxing newer goods and services. In Maryland’s case, it adopted the tax partly to help fund the state’s massive education plan, which is contributing substantially to unsustainable spending and budget challenges. A MultisSate report describes how Maryland is among many states facing such serious budget issues.

Public antipathy towards large technology companies and targeted advertising is also a major impetus for the wave of digital ad tax proposals. Supporters of Maryland’s tax made clear (here and here) that they wanted the tax to penalize “big tech companies” for “monetiz[ing] personal data for targeted advertising.” Maryland Comptroller Lierman also said in her statement that an appeal would be to “ensure that the country's biggest tech companies pay their fair share.” And of course, digital advertising taxes are among many other regulatory proposals aimed at tech such as age verification, digital privacy, data center moratoriums, and AI regulation.

In this debate about digital ads, “tech giants,” private data, and “taxing the rich,” the tax proponents misunderstand who the real winners are from this ruling – Maryland businesses that buy ads and consumers who receive them. Without the tax, those businesses can afford more ads and pass along savings and better-targeted offers to everyday people – the consumers. And in the voluntary exchange that is the lifeblood of the Internet, people share information in return for free access to websites. Targeted advertising helps people browse websites freely to find the best products and services at the best possible prices, which helps lower-income consumers the most.

Marylanders need another win in the state trial court or, better yet, state surrender. Moreover, states need an approach opposite to what we’ve seen – one that embraces lower taxes and the Internet’s free market-oriented voluntary exchange of information.

Maryland Ranks Bad for Business: Even This Left-Leaning Study Can’t Save It

On CNBC’s 2026 Top States for Business list released last week, Maryland ranks #36 overall for best business climate in the nation for business, worse than it ranked last year at #32 (1st=best for business; 50th=worst). The study evaluates all 50 states using 138 metrics across 10 categories of competitiveness.

Maryland has long struggled in similar business climate rankings (many of which CNBC incorporated into its scoring for this year). For example, on the Tax Foundation’s State Tax Competitiveness Index, Maryland ranked #46 in FY26. And on Cato Institute’s 2023 Freedom in the 50 States index, Maryland ranked #47 regarding regulatory freedom and #35 regarding fiscal freedom.

What stands out about the CNBC study is that its scoring leans "left" in several categories. Even with this progressive scoring boost, Maryland still stands at a mediocre overall (#36). Maryland avoids the bottom 10 ranking thanks primarily to "Quality of Life," "Technology and Innovation," "Education," and "Infrastructure" – categories with some of the heaviest weighting for progressive and market-interventionist policies.

For example, the Quality of Life category rewards states with more federal research funding, “livable wage” laws, union and collective bargaining protections, and even pro-abortion policies.

Maryland’s weak #36 overall ranking stems primarily from its dismal #49 ranking in the study’s "Economy" category – calling Maryland out for having one of the worst economies in the nation. In the "Economy" category, Maryland fell behind West Virginia (#48) and beat only Rhode Island (#50).

This near-last ranking on "Economy" (#49) is because Maryland scored poorly on factors like GDP growth, job growth, and overall budget picture including spending, revenues, and reserves. The "Economy" category also includes factors like the number of major corporations headquartered in each state and health of the residential real estate market. Maryland also ranks poorly on the "Cost of Doing Business" category at #44, which includes things like tax climate and related costs.

Most nearby states rank better overall: Virginia (#3), Pennsylvania (#13), and Delaware (#32). So, it’s no surprise that Marylanders are voting with their feet – a problem I wrote about here.

The General Assembly and Governor Moore need to get serious about improving Maryland's ability to attract and grow businesses. They must remember that at the end of the day, it’s everyday residents – Maryland's consumers – who benefit from a stronger economy and lower costs of doing business.

Wireless Taxes Are Way Too High

The Wireless Foundation's valuable annual report regarding the taxes and fees imposed on wireless services has just been released. It short, it paints a dismal picture for consumers with respect to the taxes, fees, and government surcharges added to their bills.

 The top line: A typical American household with four phones on a “family share” plan, paying $100 per month for taxable wireless services, would pay over $330 per year in taxes, fees, and government surcharges.

 

Taxes, fees, and government surcharges now make up a record-high 27.60% of the average wireless services bill.

 

The federal Universal Service Fund (FUSF) charge has increased again, from 12.76% to 13.36% of the average wireless services bill, and state and local taxes on the average bill also increased, from 14.01% to 14.25%. Together, you get the 27.60% total.

 

Maryland, where the Free State Foundation is located, ranks in the top quartile of those states with the highest taxes, fees, and government surcharges imposed on wireless services. Over 30% of the average Marylander's wireless services bill is composed of those add-ons.

 

Some good news: The average charge from wireless providers has decreased by 29% since 2012, from $47.00 per line per month to $33.36 per line.

 

Now the bad news: During this same time, wireless taxes, fees, and government surcharges increased from 17.18% to 27.60% of the average bill. The result – the consumer benefits from lower wireless prices are almost totally offset by higher taxes and fees.

 

Of course, the Tax Foundation's report is not just a sterile exercise in collecting and organizing data. All this matters greatly to consumers, and especially to low-income families. According to the report, approximately 83 percent of low-income adults live in wireless-only households. Wireless taxes, fees, and surcharges are regressive and disproportionally adversely impact low-income families.

 

That should be reason enough for state and local taxing authorities, and the federal government with regard to the USF fee, not only to halt the upward trend but to act to substantially reduce the current tax burden on wireless consumers!

18 … and Up? Maryland Is the Latest State to Enact a Privacy Law

Last Thursday, Free State Governor Wes Moore signed into law the Maryland Online Data Privacy Act of 2024 (MODPA). With the stroke of his pen, Maryland became the eighteenth state to adopt a comprehensive data privacy statute – one with the most onerous "data-minimization" requirements we have seen thus far.

Forgive me if I sound like a broken record, but this most-recent addition to the already substantial set of state-specific data privacy laws further compounds the confusion experienced by consumers and the compliance challenges faced by companies, particularly small businesses.

Should it become federal law, the American Privacy Rights Act (APRA) discussion draft, about which I wrote in a recent Perspectives from FSF Scholars, would preempt this patchwork and establish a desperately needed nationwide data privacy regime.

For a general overview of the MODPA, please see my two previous posts to the Free State Foundation blog on the topic, which can be found here and here. For present purposes, I want to focus specifically on the MODPA's data-minimization language, which states that "controllers" must "[l]imit the collection of personal data to what is reasonably necessary and proportionate to provide or maintain a specific product or service requested by the consumer to whom the data pertains" (emphasis added).

The data-minimization model differs from the notice-and-consent approach – pursuant to which the bounds of permissible data collection are set forth in a company's privacy policy – that until recently served as the de facto standard nationwide. And Maryland's version is the most extreme data-minimization implementation to date.

Strict data-minimization requirements such as this, and the one spelled out in the APRA, could have unintended anti-consumer consequences. Limitations on the collection of personal data beyond what is "reasonably necessary and proportionate to provide or maintain a specific product or service requested by the consumer to whom the data pertains" – or, in the case of the APRA, "beyond what is necessary, proportionate, or limited to provide or maintain a product or service requested by an individual" (emphases added) – are inherently subjective standards that create substantial uncertainty and risk for companies. And that uncertainty and risk could have a chilling effect.

For example, companies may refrain from offering the "free" (that is, ad-supported) services that many consumers have come to rely on. The notice-and-consent model traditionally has allowed consumers to weigh the benefits of sharing personal information in exchange for these free services. The shift to a data-minimization approach could undermine that model, potentially leading to a reduction in the availability of complimentary online offerings.

The MODPA will go into effect on October 1, 2025, a year later than originally proposed.

Nebraska Is State 17 to Pass Privacy Law; House Holds Hearing on APRA

In a recent Perspectives from FSF Scholars summarizing the American Privacy Rights Act (APRA) Discussion Draft, I added New Hampshire (number fifteen) and Kentucky (number sixteen) to the Free State Foundation's running list of states that have passed a comprehensive data privacy statute. The Cornhusker State in the interim has joined their ranks, upping that total to seventeen. Meanwhile, at a House Commerce Committee hearing on the APRA, more than one representative indicated that they are "fired up" (subscription required) to turn that bill into preempting federal law.

New Jersey was the first state in 2024 (and the fourteenth overall) to enact privacy legislation, a development I noted in a January post to the FSF Blog. The New Hampshire Privacy Act followed in March, the Kentucky Consumer Data Protection Act in early April. (Two days later the Maryland Online Data Privacy Act of 2024, about which I blogged here and here, cleared both legislative houses. Should it be signed by Governor Wes Moore, it will bring the tally to eighteen. That is, assuming another state – Pennsylvania, perhaps? – doesn't beat it to the punch.)

And on April 12, Governor Jim Pillen enacted the Nebraska Data Privacy Act, a statute very similar in substance to the Texas Data Privacy and Security Act, a bill that I summarized in July 2023's aptly titled "More States Compound the Dreaded Privacy 'Patchwork' Problem."

Of course, one of the aspects of the APRA Discussion Draft that I praised in "Congressional Leaders Return Privacy to the Front Burner," the Perspectives referenced above, is its language preempting state comprehensive data privacy laws: "no State or political subdivision thereof may adopt, maintain, enforce, or continue in effect any law, regulation, rule, or requirement covered by the provisions of this Act or a rule, regulation, or requirement promulgated under this Act."

As such, passage of the APRA – by no means a foregone conclusion – would eliminate the chaos and compliance contradictions created by the expanding number of state laws.

At an April 17 hearing held by the House Commerce Committee's Subcommittee on Innovation, Data, and Commerce, APRA co-author and Committee Chair Cathy McMorris Rodgers (R-WA) acknowledged that "Congress has been trying to develop and pass comprehensive data privacy and security legislation for decades" and argued that "[w]ith the American Privacy Rights Act, we are at a unique moment in history where we finally have the opportunity to imagine the internet as a force for prosperity and good."

In response, Subcommittee Chair Gus Bilirakis (R-FL) reportedly stated that he is "fired up" – and Representative Frank Pallone (D-NJ) indicated that he is "fired up too."

Report Ranks Maryland Highest in Mortgage Debt

A March 21 report by WalletHub financial writer Adam McMann ranks Maryland as the top state for mortgage debt increases. The report, "States Adding the Most Mortgage Debt,” is based on WalletHub's comparison of proprietary data for the 50 states from the third to the fourth quarters of 2023.

According to the WalletHub report, Maryland had the largest increase in average monthly mortgage between the third and fourth quarters of last year. During that time span, the average mortgage debt balance in Maryland rose 1.23% to $283,092. Underscoring the significance of that mortgage debt increase, is the report's finding that "no other state had an increase above 1%" and average mortgage debt actually decreased in 17 states during the fourth quarter of 2023.

 

The report states that “Maryland residents also have one of the biggest mortgage balances in general" and that "[t]heir average monthly payment is very high as a result, $2,145." On top of very high monthly mortgage debt, the report points out that "Maryland residents also have to deal with a relatively high property tax rate on their homes." A February 2024 ranking of state property tax rates by WalletHub found that Maryland had an effective real estate tax rate of 1.02%.

 

One common-sense takeaway from Maryland's high average monthly mortgage debt and its real estate tax burden is that Maryland's legislature should resist any future real estate tax rate hikes and it should instead consider providing real estate tax relief for Maryland residents.  

Maryland House of Delegates, Senate Approve Data Privacy Bills

On Saturday – just ahead of yesterday's "crossover day" deadline – the Maryland House of Delegates voted 105-32 to approve HB-567, comprehensive data privacy legislation. The cross-filed Senate bill, SB-541, passed unanimously last Thursday.

Should the Maryland Online Data Privacy Act of 2024, which has been referred to conference, become law, it would represent the sixteenth contribution to the state-level "patchwork" of comprehensive data privacy laws that has emerged in the face of Congress's continuing failure to act.

For an overview of the law's specific provisions, please see "Free State Lawmakers Debate Data Privacy Legislation," a February 2024 post to the FSF Blog.

Free State Lawmakers Debate Data Privacy Legislation

Maryland soon could join the not-so-exclusive club for states that have forged divergent data privacy regulatory paths. Last month, New Jersey became the fourteenth state (and the first this year) to enact a comprehensive data privacy law, a development that I highlighted in a January 2024 post to the Free State Foundation's blog. Yet another bill awaits the signature of New Hampshire Governor Chris Sununu.

As I detailed most recently in "More States Compound the Dreaded Privacy 'Patchwork' Problem," a July 2023 Perspectives from FSF Scholars, the longstanding lack of a federal data privacy regime – specifically, one that preempts inconsistent state-specific approaches – has fostered an unworkable situation that creates compliance headaches for companies and confusion for consumers.

Hearings on the Maryland Online Data Privacy Act of 2024 (the Act) were held on February 13, 2024, by the House Economic Matters Committee (House Bill 567) and on February 14, 2024 by the Senate Finance Committee (Senate Bill 541).

The Act establishes a familiar set of consumer rights: to know that personal data is being collected; to access, correct, delete, and receive a copy of personal data; to obtain a list of the categories of third parties to which personal data is disclosed; to opt out of the processing of personal data for targeted advertising and automated profiling; and to opt out of its sale.

Perhaps most notably, the Act goes further than other state laws in limiting the personal data that companies may collect – that is, "data minimization" ("A controller shall … [l]imit the collection of personal data to what is reasonably necessary and proportionate to provide or maintain a specific product or service requested by the consumer to whom the data pertains.")

On its face, the Act does not create a private right of action. As was the case with the New Jersey law reference above, however, the Act's draft language has prompted concerns that it "do[es] not explicitly provide for exclusive Attorney General enforcement" (emphasis added). Specifically, Section 14-4613, which defines a violation of the Act as "[a]n unfair, abusive, or deceptive trade practice … [s]ubject to the enforcement and penalty provisions contained in Title 13 of this article," also ambiguously asserts that it "does not prevent a consumer from pursuing any other remedy provided by law."

Breaking from the approach embraced by other states, and thus further complicating compliance for companies, the Act does not provide businesses with an opportunity to cure alleged violations.

If enacted, the Act would go into effect on October 1, 2024.

State Court Strikes Down Maryland's Digital Ad Tax

On Monday, a Maryland judge held the nation's first – and, to date, only – digital ad tax, H.B. 732, to be both unconstitutional and inconsistent with federal legislation. The Free State statute, which became law only after a General Assembly override of Governor Larry Hogan's veto, imposed a sliding-scale levy on certain providers of digital advertising – but not on all, and not on traditional advertisers – that required large digital platforms (such as Google and Facebook) to remit up to 10 percent of annual gross revenues derived from "digital advertising services."

As Free State Foundation President Randolph May and I explained in "Maryland's Proposed Digital Advertising Tax Would Do Harm," a March 2020 blog post, H.B. 732 not only was vulnerable to legal challenges under the Permanent Internet Tax Freedom Act, the First Amendment, and the Commerce Clause, it also imposed higher prices on local businesses that depend on online advertising to reach their customers and, by direct extension, consumers themselves.

"Anne Arundel County Courthouse June 2005" by Wikipedia user Something Original

is licensed under CC BY-SA 3.0.

A group of impacted Comcast subsidiaries and Verizon Media (now Yahoo) sought judicial relief in the form of a Declaratory Judgment in April 2021. Yesterday, Judge Alison L. Asti of the Anne Arundel County Circuit Court, ruling from the bench, granted their Motion for Summary Judgment.

As expected, Judge Asti reportedly found that H.B. 732 impermissibly interferes with interstate commerce, thereby implicating the Commerce Clause; runs afoul of the Permanent Internet Tax Freedom Act's prohibition on discriminatory taxes; and, because it is "not viewpoint neutral," violates the First Amendment.

Comcast and Verizon Media are not the only ones to have challenged Maryland's digital ad tax in court. As I noted in a contemporaneous post to the FSF Blog, a group of trade associations filed a Complaint for Injunctive and Declaratory Relief with the U.S. District Court of Maryland Northern Division on February 18, 2021. Oral arguments on the parties' motions for summary judgment are scheduled to take place at the end of next month.

Maryland Plunges to a New Low: It Ranks 46th in the State Business Tax Climate Index

The Tax Foundation just released its 2022 State Business Tax Climate Index—and, unfortunately, Maryland continues its downward slide. It now ranks 46^th overall among the states and the District of Columbia due to bottom-half ratings in each of the measured subcategories. This is Maryland's lowest ranking since at least 2014 and possibly marks its all-time low. It should be a clarion call of the need for tax reform in the state.

States compete with other states for businesses, residents, investment, jobs, and revenues by implementing business-friendly tax policies, and Maryland's rank as 46^th shows serious room for improvement. As the Tax Foundation explains, a business-friendly tax environment does not mean tax-free anarchy. It means structuring major taxes with "low rates and broad bases." The broader the "base," meaning the total amount of economic activity subject to a specific tax, the lower the rate a state needs to impose to achieve its revenue target.

The Tax Foundation's State Business Tax Climate Index assesses a state's overall performance based on five major areas of taxation that affect business: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Some states do not assess all of these taxes, but that fact does not guarantee strong performance on the Index. Utah and Indiana, both of which rank in the top 10, impose all of the major taxes as Maryland does, but they avoid "complex, nonneutral taxes with comparatively high rates" that detract from Maryland's economy.

Maryland could improve in virtually every area, because its 46^th overall rank reflects its bottom-half performance in every category:

• Unemployment insurance tax (46^th)
• Individual income tax (45^th)
• Property tax (43^st)
• Corporate tax (33rd)
• Sales tax (26^th)

Over the years, Maryland has been a consistent bottom-tier performer with unemployment insurance taxes, because it does not have "rate structures with lower minimum and maximum rates and a wage base at the federal level," which cause uneven burdens on employers. Maryland has the highest minimum unemployment insurance tax rate in the country at 2.2% and one of the highest maximum rates at 13%. It also relies on a wage base above the federal level. These factors lead to non-neutrality in the unemployment tax by assessing more tax on struggling businesses and industries with endemic turnover, like retail. It makes little sense to burden struggling businesses with high unemployment taxes when doing so risks more unemployment.

Maryland also has a high progressive individual income tax that places it in the bottom 10% of states in this category. This is a problem for Maryland's business climate because "a significant number of businesses, including sole proprietorships, partnerships, and S corporations, report their income through the individual income tax code." Progressive taxes disincentivize labor over leisure for high income earners, which means Maryland's tax code encourages wealthy individuals to spend money on activities like travel and entertainment instead of hiring workers and investing in Maryland's economic growth. This disincentive is especially concerning at the state level, where individuals can "vote with their feet" by relocating to lower tax jurisdictions. Maryland's income tax also ranks poorly because it is not indexed to inflation, includes a marriage penalty, and double-taxes capital gains and dividends. Maryland could improve its business environment by eliminating or reducing the extent of these problems.

Maryland's property tax regime falls in the bottom-10. Property taxes are not just taxes on ownership of real property—they also include any tax assessed to tangible or intangible property, such as business inventory taxes, real estate transfer taxes, estate taxes, and inheritance taxes. Maryland's poor performance on the Business Tax Climate Index is largely attributable to its property taxes that distort business decisions. For example, Maryland taxes business inventories, a tax that has the effect of discriminating against retailers and forcing businesses to factor tax minimization into sales and procurement strategies. Maryland also taxes real estate transfers, which increases compliance costs and distorts decisions when businesses or individuals seek to transfer non-liquid assets, including small business and family-owned property. Maryland is also the only state in the country to levy both an estate tax and an inheritance tax, often causing double-taxation of inherited property. These taxes cause businesses and individuals in Maryland to make decisions about property based on tax strategy rather than economics, so they should be eliminated.

Maryland's corporate tax ranking is not quite as abysmal as it is in the previous three categories but it still needs work. High corporate tax rates with progressive bracketing discourage businesses, especially when nearby states have lower taxes. In Maryland, corporations pay an 8.25% tax rate on business profits. Imposing a single rate is positive. But 8.25% is a relatively high rate compared to other states, so businesses may be deterred from locating in Maryland, especially when nearby Virginia has a lower 6% rate. Additionally, Maryland does not conform with federal policy for deducting depletion, which adds complexity for businesses that deal with natural resources. Maryland should reduce its corporate rate and conform with federal depletion policy to attract business.

Maryland's sales tax regime earned the state's best subcategory ranking, but this ranking was still relegated to the bottom-half thanks to "including too many business inputs, excluding too many consumer goods and services, and imposing excessive rates of excise taxation." For example, Maryland's 6% sales tax rate could be reduced if it didn't provide a wide variety of sometimes seemingly arbitrary exemptions for various goods and services. Meanwhile, Maryland taxes business production inputs like leases, information services, and office equipment. Businesses likely pass taxes imposed on these items to end users of finished products, on whom the sales tax might apply again. Maryland could improve its ranking by eliminating exemptions for consumer goods and services while exempting inputs—creating a broader base that allows for overall lower sales tax rates.

The harmful effect of Maryland's 46^th place overall ranking becomes clear when you consider the more competitive rankings of adjacent states. All of the states bordering Maryland have better Business Climate Index rankings, except for the District of Columbia. These states include Delaware, Pennsylvania, Virginia, and West Virginia. Delaware's 16^th place ranking is the best, and this might help explain why Delaware has the highest population growth rate among Maryland and its neighboring states. Virginia ranks 25^th on the Index and also has a higher population growth rate than Maryland. While Maryland has faster population growth than Pennsylvania (29^th) and West Virginia (21^st), the potential for these states to outcompete Maryland for business and residents solely because of Maryland's unduly high tax rates and overly burdensome tax policies should alarm lawmakers.

The 46^th place ranking on the State Business Tax Climate Index should be a wakeup call to Maryland's government officials and its citizens. This bottom-dwelling ranking suggests that Maryland's tax code pushes investment, job growth, and revenue, as well as jobs and potential new residents to other states. And because Maryland's ranking has continually declined over the last decade, it appears other states are taking the benefits of tax reform more seriously.

Adoption by the legislature of the tax reforms suggested above, and others discussed in the Index, would stop Maryland from losing further ground to other states, including its neighbors, and would help spur more economic growth that would benefit all of Maryland's residents.

Maryland's Unlawful Compulsory License for eBooks Should Have a Short Shelf Life

Copyright protections secured by federal law preempt state laws that interfere with them. Yet the Maryland legislature apparently ignored or didn't realize that when it enacted Maryland House Bill (HB) 518 in May of this year. The law, if it goes into effect in 2022, would grant Maryland public libraries a state-level compulsory license to access eBooks, audiobooks, and other digital literary works belonging to copyright owners at state-regulated rates. But a lawsuit filed in U.S. District Court on December 9 almost certainly means that the state's law will have a short shelf life. 

Maryland HB 518 seeks to give Maryland public libraries a special right of forced access to privately-owned digital literary works on supposed "reasonable terms." But under the U.S. Constitution's Copyright Clause and Section 106 of the federal Copyright Act, copyright owners possess exclusive rights to decide who can reproduce, distribute, display, and publicly perform their works and under what conditions. Indeed, the Copyright Act is the exclusive source of law governing the exclusive rights of copyright owners. As a result, Maryland HB 518 is expressly preempted by federal law – and it's not a close call. 

Federal copyright protections for literary works were foremost in the minds of the Founding Fathers when they drafted and ratified the Constitution of 1787. Free State Foundation President Randolph May and I wrote about this extensively in our book The Constitutional Foundations of Intellectual Property: A Natural Rights Perspective (Carolina Academic Press, 2015). The Constitution's Article I, Section 8 Copyrights Clause granted Congress the power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." And as James Madison observed in Federalist No. 43, the Constitution gave Congress that authority because "[t]he States cannot separately make effectual provisions for either of the cases, and most of them have anticipated the decision of this point, by laws passed at the instance of Congress."

The Copyright Act's exclusive jurisdiction over the exclusive rights of copyright owners is stated –  in unmistakably broad terms – in Section 301(a)'s preemption provision: 

On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

In our most recent book, Modernizing Copyright Law for the Digital Age: Constitutional Foundations for Reform (Carolina Academic Press, 2020), FSF President May and I strongly urged Congress to reject any future imposition of compulsory licensing and rate regulation on copyrighted works because such onerous restrictions are antithetical to the property rights and free market foundations of American copyright law and policy. Similarly, Maryland and other states should refrain from trying to impose compulsory licenses and rate controls on copyrighted works. 

In view of the strong legal claims raised against Maryland HB 518 in the pending case of Association of American Publishers, Inc. v. Frosh, it is most likely that the law will never go into effect. Other states should learn from HB 518's bad example and not seek to repeat it. 

Coalition of Trade Associations Sue Over Maryland Digital Ad Tax

In a Tuesday post to the Free State Foundation's Blog, I reported that both chambers of the Maryland General Assembly had voted, by substantial margins, to override Governor Larry Hogan's veto of a gross revenues tax on digital advertising services. As anticipated, yesterday a group of trade associations sued in the U.S. District Court for the District of Maryland (Northern Division) seeking declaratory and injunctive relief.

Filed by the Chamber of Commerce of the United States of America, Internet Association, NetChoice, and the Computer & Communications Industry Association, the complaint alleges that H.B. 732 "is a punitive assault on digital, but not print, advertising" and "is illegal in myriad ways."

Specifically, the plaintiffs argue that H.B. 732 (1) "is preempted by the Internet Tax Freedom Act (ITFA), which prohibits States from imposing 'multiple and discriminatory taxes on electronic commerce,'" and (2) "violates the Due Process Clause and Commerce Clause of the United States Constitution by burdening and penalizing purely out-of-state conduct and interfering with foreign affairs."

A copy of the complaint can be found here.

Maryland's Digital Ad Tax to Become Law After Veto Override

Maryland's first-in-the-nation gross revenues tax on digital advertising services will take effect in less than 30 days. Legal challenges likely will follow soon thereafter.

H.B. 732, passed by the General Assembly at the end of the pandemic-shortened 2020 legislative session, was vetoed by Governor Larry Hogan. On Friday, the State Senate voted 29-17 to override that veto. The House of Delegates did the same the day prior, by an 88-48 margin.

H.B. 732 imposes a gross revenues tax on digital advertising services provided by companies that earn more than $100 million globally. Gross annual revenues will be taxed at rates that begin at 2.5 percent (for companies with revenues between $100 million and $1 billion) and increase to 5 percent (revenues between $1 billion and $5 billion), 7.5 percent (revenues between $5 billion and $15 billion), and 10 percent (revenues over $15 billion).

As Free State Foundation President Randolph J. May and I described last spring in a post to the FSF Blog and an op-ed in the Baltimore Sun, this tax will harm both consumers and businesses in Maryland. The higher marketing costs that result inevitably will lead to higher prices for the goods and services advertised, lower consumption, and reduced tax revenues. It also is vulnerable to legal challenges under the Permanent Internet Tax Freedom Act, the Commerce Clause, and the First Amendment.

S.B. 787 and companion bill H.B. 1200, introduced on February 5 and 8, respectively, would modify H.B. 732 by (1) exempting the "digital interfaces" (that is, websites and apps) of television and radio broadcasters and news media entities, and (2) prohibiting those subject to the tax from passing on its costs directly via a separate fee, surcharge, or line item. However, the proposed legislation would not bar providers of digital advertising services from recouping those costs indirectly via higher prices.

State Digital Advertising Taxes Threaten the Economic Recovery

Today is Black Friday. In a normal year, throngs of eager bargain hunters would have started to form lines outside of brick-and-mortar businesses early this morning/late last night. As we all know well, however, 2020 is no ordinary year. Fortunately, online commerce is here to save the day.

But as I wrote in an April 30 Perspectives from FSF Scholars, taxes that single out digital advertising threaten the Internet-based activity that buoys our economy during these challenging times.

Nevertheless, states continue to eye e-commerce as a potential new revenue source.

In March, Free State Foundation President Randolph J. May and I criticized Maryland's digital ad tax in a blog post and Baltimore Sun op-ed. Governor Larry Hogan vetoed that bill in May, but "[t]he General Assembly, where Democrats hold a veto-proof majority, will take up whether to sustain or overturn the veto when it reconvenes in January."

2021 could see similar attempts in other states. In Washington, the not-yet-introduced H-0028.1 would increase taxes on digital advertising services by treating them as "digital automated services" rather than "advertising services." Other states considering similar bills include Nebraska, New York, and West Virginia.

We will continue to monitor and provide updates on such efforts.

MD Governor Hogan Vetoes Digital Ad Tax

On May 7, Maryland Governor Larry Hogan vetoed the first-of-its-kind state digital advertising tax passed by the General Assembly on March 18. House Bill (H.B.) 732 was part of a package ushered through during the last days of a coronavirus-shortened legislative session in order to implement and fund costly education reforms recommended by the so-called Kirwan Commission. In doing so, Governor Hogan declared that:

These misguided bills would raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling. With our state in the midst of a global pandemic and economic crash, and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now. To do so would further add to the very heavy burden that our citizens are already facing.

 The Free State Foundation could not agree more.

In a March 13 blog post and March 30 op-ed in The Baltimore Sun, FSF President Randolph May and I explained why H.B. 732 would be bad policy under the best of circumstances. More recently, in an April 30 Perspectives, I argued that H.B. 732 (as well as similar bills that have been introduced in New York) would undermine the central role that online commerce can play as we endure, and recover from, the economic impact of COVID-19.

H.B. 732 at passage enjoyed sufficient support to override Governor Hogan's action yesterday, but much has changed since. The General Assembly should acknowledge the radically altered economic reality that exists today and allow this veto to stand.

New York Lawmakers Unveil Two Digital Advertising Tax Proposals

For states scrambling to tap new sources of tax revenue, digital advertising is the low-hanging fruit du jour. The Maryland General Assembly was the first in the nation to pass such a bill.  New York lawmakers now threaten to follow its unfortunate example.

Free State Foundation President Randolph May and I have written previously about Maryland House Bill (H.B.) 732, a misguided attempt to fund costly education proposals through a tax that singles out digital advertising. H.B. 732 awaits action, ideally in the form of a veto, by Governor Hogan.

On March 13, New York State Senator and Deputy Majority Leader Michael Gianaris (D – Twelfth Senate District) introduced a near word-for-word copycat bill. Senate (S.) 8056 tracks H.B. 732 down to its reference to the "comptroller," despite the fact that, in New York, the relevant agency is the Department of Taxation and Finance.

However, S. 8056 does deviate from H.B. 732 in one key respect: it applies only to digital "advertising services ... that use personal information about the people the ads are being served to."  This is noteworthy given the inspiration behind H.B. 732: a proposal by economist Paul Romer designed to end the use of targeted advertising through the imposition of a punitive tax.

More recently, New York State Senator Kevin Thomas (D – Sixth Senate District) on April 13 unveiled legislation that would tax digital advertising in order to fund zero-interest student-loan debt refinancing. Rather than establishing a separate tax, S. 8166 would include digital advertising within the sales tax base.

These proposals are unlikely to survive judicial challenge. Should they become effective, unintended but foreseeable economic consequences will overshadow their hoped-for benefits. New York lawmakers therefore should look elsewhere for additional revenue.

Baltimore Sun Op-Ed Urging Veto of MD Digital Ad Tax

Today's edition of the Baltimore Sun features an op-ed that Free State Foundation President Randolph J. May and I wrote regarding the ill-conceived, and first of its kind, tax on digital advertising recently passed by the Maryland General Assembly.

In a blog post on March 13, we addressed the shortcomings of what at the time was pending legislation. An effort to generate additional revenues for education based upon a proposal conceived to discourage targeted advertising, Senate Bill 2 inappropriately singled out one form of commercial speech – digital, but not traditional – advertising, in violation of both specific federal law and the First Amendment.

It targeted large platforms (e.g., those that generate more than $100 million in annual gross revenues) with a tax ranging from 2.5 to 10 percent of annual gross revenues derived from "digital advertising services," unduly burdening interstate commerce – and implicating the Commerce Clause – by sweeping in revenues generated both in other states and globally.

And it relied upon an unworkable mechanism to determine when digital advertising is provided within Maryland's borders.

Nevertheless, on March 18, Maryland's legislature adopted an amended version of S.B. 2, House Bill 732. H.B. 732 responds to that last critique – S.B. 2's failure to identify accurately in-state digital advertising – by punting the question to a future rulemaking by the Comptroller. Otherwise, it suffers from all of the flaws we identified in S.B. 2.

The FSF op-ed, which urges Maryland Governor Larry Hogan to veto this misguided bill, can be found here. 

Maryland Governor Hogan Announces Rural Broadband Funding

Maryland Governor Larry Hogan has announced $9.9 million in available funding as part of the first wave of a five-year plan to provide 225,000 Marylanders in rural communities with reliable, Internet access.

Read the press release here announcing the funding and the details of Maryland's five year plan for expanding broadband access in rural areas.

Maryland Should Reduce Regulations and Fees That Inhibit Broadband Deployment

On January 2, 2018, I published a blog suggesting that Maryland Governor Larry Hogan should reestablish the Regulatory Reform Commission and should specify as one of its tasks identifying unnecessary taxes and fees. More specifically, the Commission and the Maryland General Assembly, which convenes this week for its 2019 legislative session, should focus on reducing regulatory and tax burdens that stifle broadband deployment and slow the delivery of next-generation wireless services. According to two recent reports, Maryland has one of the most burdensome regulatory processes with regard to broadband deployment and some of the highest wireless tax rates in the country.

A new report by the R Street Institute ranks Maryland 45^th out of 50 in terms of how conducive its laws are to broadband deployment. Importantly, Maryland presently does not require localities to adopt "shot clocks" to ensure timeliness for the processing of applications or to employ hard caps on fees pertaining to accessing public rights-of-ways, acquiring construction permits, or installing pole or collocation attachments. For example, the fees localities charge for public rights-of-way access are not required to be non-discriminatory or based on an estimation of costs, meaning local governments can charge whatever they want and can charge different prices to different providers despite granting the same level of access. Whether a wireless or wireline provider of broadband access, building and upgrading a network requires a significant number of permits from the local government. Without shot clocks and without hard caps on fees, the regulatory costs imposed by impediments associated with the local government approval process slows broadband deployment.

Deploying communications networks includes heavy capital investments from broadband providers. If fees are excessively high, it will discourage competition from small providers who cannot afford access. Also, if the regulatory costs differ significantly among jurisdictions, it could discourage providers from upgrading networks in certain localities. Although there is high demand in a relatively densely-populated, wealthy state like Maryland, the margin between profit and loss is very small in the dynamically competitive broadband market.

In May 2015, Governor Hogan signed House Bill 541, which required the Public Service Commission to convene a workgroup to study attachments to utility poles in Maryland. The workgroup found in a January 2016 study that the “terms and conditions for pole attachments are adequate” and the “rates charged to pole attachers are reasonable.” But with the emergence of the 5G revolution, small cell deployment in a populated locality will require hundreds if not thousands more pole attachments than 4G, meaning the existing terms and conditions likely are outdated. With 5G deployment, wireless providers will deploy small cells on already existing buildings or utility poles, a practice called “collocation.” Without shot clocks for the review of collocation applications and without hard caps on the fees localities can charge, the regulatory uncertainty will slow 5G investment in Maryland. In 2018, Maryland policymakers introduced small cell legislation to minimize these regulatory barriers and streamline 5G deployment, but the Senate and House bills failed to pass.

If Maryland wants to continue to be considered a prime location for innovative businesses, it should adopt rules that give guidance to local governments regarding streamlining the application and approval processes and charging cost-based fees that properly compensate the local governments without slowing 5G deployment.

Moreover, according to a recent report by the Tax Foundation, Maryland, at an average rate of 13.89%, has the 15^th highest combined state and local wireless tax rate in the United States. This means its wireless tax rate is 2.31 times the size of its general sales tax of 6%, which is the 9^th highest disparity multiple in the U.S.

Of course, some localities impose higher tax rates than others. In Baltimore, residents pay an effective tax rate of about 25% for wireless services. At the end of 2017, over 68% of all poor adults had wireless-only voice service and nearly 24% of Baltimore’s population falls below the poverty level. Additionally, more and more consumers are substituting mobile wireless broadband for fixed broadband. And while this trend is occurring across all demographics, it is particularly prevalent among low-income and minority consumers. About 31% of U.S. adults making less than $30,000 a year are wireless-only with regard to broadband service. And 35% of Hispanic adults and 24% of black adults also are wireless-only. Maryland’s relatively high wireless tax rates unnecessarily raise the price of wireless services and harm all consumers, but they disproportionately harm low-income and minority consumers.

The Regulatory Reform Commission’s December 2015 report recommended streamlining application review processes, reducing fees and payment frequency, and expanding minority and disadvantaged business opportunities. These recommendations have not been implemented yet with regard to the taxation and regulation of broadband and wireless communication services.

As stated in last week's blog, Governor Hogan’s regulatory reform efforts have improved Maryland’s business climate and its overall fiscal condition. To continue this progress, Governor Hogan should reestablish the Regulatory Reform Commission and task it with identifying more regulations, taxes, and fees that discourage economic activity. The communications and broadband marketplace would be a good place to start.