In a brief filed on April 29, 2022, the Maryland Attorney General’s Office (Attorney General) agreed that the “pass-through prohibition” of the state’s digital advertising tax “does not purport to impose any restriction on what the taxpayer may say to the customer, or anyone else, about” increased billing charges because of the tax.

Last year, Maryland lawmakers enacted a first-of-its-kind digital advertising tax on the annual gross receipts from the provision of digital advertising services. The tax only applies to companies with annual gross revenues of $100 million or more. Shortly thereafter, Maryland lawmakers added a pass-through prohibition, which provides that “[a] person who derives gross revenues from digital advertising services . . . may not directly pass on the cost of the [tax] to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.”

In litigation brought by McDermott Will & Emery in Maryland federal court, several leading trade associations have challenged the pass-through prohibition on the basis that it violates the First Amendment of the US Constitution by regulating how sellers may communicate their prices on invoices, billing statements and the like. However, in a brief seeking dismissal of the litigation, the Attorney General claimed that the pass-through prohibition does not regulate speech but instead only prohibits the “conduct of directly passing through to a customer” the tax burden.

Highlighting what it agrees to be the limited scope of the pass-through prohibition, the Attorney General states as an “example” that if a “taxpayer wishes to inform [a] customer that [an] invoiced charge is higher than it might otherwise be due to the imposition of the digital ad tax, the taxpayer is free to communicate that or any other message.” (Emphasis added). Further, the Attorney General agrees that “if the taxpayer wants to use the invoice as an opportunity to engage in political speech, the taxpayer is free to express its displeasure with the tax and identify who bears political responsibility for [the] new tax.”

Consistent with this position, the Attorney General does not dispute that the digital advertising tax may be reflected in the amounts charged to customers. Instead, the Attorney General argues that the pass-through prohibition is a “prohibition against direct, as opposed to indirect, pass-through of the tax cost,” which is intended to ensure that the taxpayer’s “annual gross revenues” subject to the tax “reflect the full amount of revenues received from customers, undiminished by any tax costs that the taxpayer might otherwise have preferred to pass directly to the customer.”

The parties are scheduled to file additional briefs in the case on May 13, 2022. The case is Civil No. 21-cv-410 (D. Md., filed February 18, 2021). Sarah P. Hogarth, Paul W. Hughes, Michael B. Kimberly and Stephen P. Kranz, partners in McDermott’s Washington, DC, office, represent the plaintiffs.

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