Maryland Tax Court Allows Apple’s Challenge to Digital Advertising Tax to Move Forward

The Maryland Tax Court has denied the Comptroller of Maryland’s motion to dismiss Apple Inc’s refund claim for Digital Advertising Taxes paid, allowing the case to move forward in the appeals process.

The fraught history of the Maryland Digital Advertising Tax in court has led many businesses, along with Apple, to submit claims before the tax court, but they have encountered issues meeting their administrative burden to file a claim. After the tax originally came into effect in January 2022, it was overturned by a Maryland Circuit Court as unconstitutional and in violation of the Internet Tax Freedom Act in October 2022. In summer 2023, the Maryland Supreme Court overturned the lower court ruling and reinstated the tax because the taxpayers in the case had not exhausted their administrative remedies by filing an appeal to the tax court.

Apple filed their claim for a refund of the estimated Digital Advertising Tax paid for the first three quarters of the year in November of 2022 after the tax was originally struck down. The Comptroller tried to have the case dismissed because Apple had not fully exhausted their administrative remedies with the Comptroller of Maryland before appealing to the tax court, as the original refund claim was invalid. When Apple filed their claim for a refund, only pre-payments towards the annual return were filed, which the Comptroller argued invalidated their refund claim as the Comptroller needed the annual return to assess the merit of the refund claim. The judge dismissed this argument, as the form used to file the annual return was not made available to taxpayers by the Comptroller until February 2023, and Apple had provided amended copies of all their quarterly prepay returns.

As prior state level challenges were decided in favor of the Comptroller based on other appellants failure to exhaust their administrative remedies and appeal to the tax court, the Maryland Tax Court denying this motion for dismissal is hopeful news for both Apple and other digital companies in their attempts to have the taxes struck down once again as unconstitutional.

A simultaneous federal court case is currently appealing the dismissal of their case by a district court judge. (Apple Inc. vs. Comptroller of the Treasury of Maryland, 23 DA-00-0456, Maryland Tax Court)


UPDATE from 1/10/2024: The Federal Court case, which was brought against the Comptroller of Maryland by the United States Chamber of Commerce on behalf of multiple parties, was originally dismissed by the district court as moot after the tax was first overturned in the state courts. Since the tax has now been reestablished, the Fourth Circuit Court of Appeals has overturned the original dismissal effective January 10, 2024, allowing the case in part to proceed back at the district court.

The first three counts brought by the Chamber of Commerce were originally dismissed because of the Tax Injunction Act, which keeps federal courts from ruling on state tax matters when states have laws allowing taxpayers to appeal the taxes at issue. These three counts were originally dismissed with prejudice, which did not allow them to be taken to another court, and have been revised to be dismissed without prejudice, allowing the taxpayers to file the same complaints in Maryland’s state courts if they wish.

The fourth charge, which argues that the part of the Digital Advertising Tax law that restricts the taxpayers from passing on the tax to their customers violates the First Amendment, is now allowed to proceed in Federal Court, as it is not restrained by the same rules as the first three charges. The appeals court sent the fourth charge back to the District Court for further investigation, meaning that the Federal Case against the Maryland Digital Advertising Tax may now continue. (Chamber of Commerce of the U.S. et al. v. Lierman, case number 22-2275, U.S. Court of Appeals for the Fourth Circuit)

Posted on January 11, 2023