Maryland’s Digital Advertising Gross Revenue Tax (DAGRT) has been declared unconstitutional and pre-empted by federal law, marking a significant development for businesses subject to digital advertising taxes in the United States. On August 14, 2026, the Maryland Tax Court issued separate decisions involving Apple Inc., Google LLC, and Peacock TV, LLC, granting summary judgment to all three petitioners and ordering Maryland to refund approximately $535.5 million in tax payments, plus interest.
The decision is particularly important because Maryland was the first state in the country to impose a tax directly on digital advertising. The Tax Court found that the tax violated the Internet Tax Freedom Act (ITFA) and provisions of the U.S. Constitution relating to the Commerce Clause and Due Process Clause. In the Peacock TV case, the court also found part of the law’s exemption structure unconstitutional under the First Amendment.
While the decisions are formally binding only on Apple, Google, and Peacock TV, their reasoning could have wider implications. Businesses operating in states such as Illinois, Washington and Utah may now have additional grounds to examine their own digital advertising tax exposure and potential refund opportunities.
Background
Maryland’s General Assembly enacted the Digital Advertising Gross Revenue Tax in February 2021, overriding the veto of then-Governor Larry Hogan. The legislation made Maryland the first state in the country to directly tax digital advertising. Maryland General Assembly – Tax-General Article §7.5-101
The tax applied to companies with more than $100 million in global annual gross revenue and at least $1 million in annual gross revenue derived from digital advertising services in Maryland. Depending on the company’s global annual revenue, the tax rates ranged from 2.5% to 10%. The tax became effective for tax year 2022.
Under Maryland law, digital advertising services include advertising on a digital interface, including banner advertising, search engine advertising and interstitial advertising. The statute defines a digital interface broadly to include software such as websites, portions of websites and applications.
The tax was challenged almost immediately.
In 2022, an Anne Arundel County circuit court struck down the tax on grounds similar to those ultimately adopted by the Maryland Tax Court. However, the Supreme Court of Maryland vacated that judgment in 2023 because the plaintiffs had not first exhausted Maryland’s administrative refund process.
The taxpayers subsequently filed formal refund claims with the Comptroller. Those claims were denied and ultimately appealed to the Tax Court.
A separate legal development came in August 2025, when the U.S. Court of Appeals for the Fourth Circuit struck down a related provision that prohibited businesses from passing the tax cost to customers as a separate line-item charge. The court found that provision violated the First Amendment. Although the ruling did not invalidate the underlying tax, it became another indication that Maryland’s digital advertising tax faced significant legal challenges.
The Maryland Comptroller had continued to administer the tax. Its Technical Bulletin 59, effective July 11, 2025, provides guidance on the tax, including its application to digital advertising revenues and the filing obligations of taxpayers.
Court Findings
The Maryland Tax Court ruled against the state on the principal legal arguments raised by the petitioners.
The court found the DAGRT invalid under the Internet Tax Freedom Act, the Commerce Clause, and the Due Process Clause.
Violation of the Internet Tax Freedom Act
The Internet Tax Freedom Act prohibits discriminatory taxation of electronic commerce. Broadly, a tax cannot discriminate against electronic commerce where comparable transactions conducted through non-digital means are not subjected to a similar tax.
The Tax Court found that Maryland imposed a tax on digital advertising while not imposing a comparable statewide tax on offline advertising services such as billboards, print, direct mail and broadcast media.
According to the court’s reasoning, this distinction created the type of discriminatory treatment prohibited by the ITFA.
This part of the ruling is especially significant because the issue was not simply whether Maryland could tax advertising. The question was whether the state could single out digital advertising for taxation while leaving comparable offline advertising services outside the same tax framework.
Violation of the Commerce Clause
The court also examined the tax under the Commerce Clause.
A state tax imposed on interstate commerce must satisfy a four-part framework. The taxed activity must have substantial nexus with the state, the tax must be fairly apportioned, it must not discriminate against interstate commerce, and it must be fairly related to services provided by the state.
The Tax Court found problems with Maryland’s approach to apportionment.
The tax rate was determined using a company’s global annual gross revenue, rather than the amount of advertising activity actually conducted in Maryland. As a result, two companies generating the same amount of Maryland advertising revenue could face different tax rates because their global businesses were different in size.
The court found that this structure undermined fair apportionment and created what courts refer to as a lack of external consistency. In practical terms, the tax could reach economic activity that did not have a sufficient connection to Maryland.
The court also found that the structure discriminated against interstate commerce because the tax fell more heavily on companies with significant out-of-state and global operations while smaller, more Maryland-focused businesses were left outside the same burden.
Violation of the Due Process Clause
The court separately found that the DAGRT violated the Due Process Clause.
Due process requires a sufficient connection between the taxing state and the person, activity or property being taxed. It also requires a rational relationship between the taxable base and the taxpayer’s activities within the state.
The court concluded that Maryland’s tax failed the second requirement.
Because the tax rate was linked to worldwide revenue, the amount of tax collected by Maryland did not reliably correspond to the value of digital advertising activity actually taking place in the state.
First Amendment (Peacock TV only)
The Peacock TV decision raised an additional First Amendment issue.
Maryland’s law contained exemptions for certain news media entities and broadcast entities. However, the definition of a news media entity excluded aggregators and republishers of third-party content.
The Tax Court found that applying this distinction required officials to evaluate the content and purpose of a publication. Because this created a content-based distinction, the court found the exemption structure incompatible with the First Amendment.
The court separately rejected Peacock TV’s foreign Commerce Clause challenge.
The First Amendment ruling therefore applied specifically to Peacock TV, while the broader ITFA, Commerce Clause and Due Process findings addressed the validity of the DAGRT itself.
The Path Forward
The immediate financial consequence of the decisions is substantial.
The Tax Court ordered Maryland to refund the taxes paid by Apple, Google and Peacock TV, together with interest. The combined amount is approximately $535.5 million plus interest.
However, the refund process is not necessarily immediate.
The Comptroller has 30 days from the decisions to petition for judicial review in circuit court, and Maryland officials have indicated that they intend to continue defending the law. Any judicial review could therefore extend the litigation and prolong uncertainty around the tax.
There is another important distinction for taxpayers.
The Tax Court’s decisions are formally binding only on the three named petitioners. The rulings do not automatically create a refund entitlement for every taxpayer that paid the DAGRT.
However, the Comptroller’s existing guidance allows a company that paid digital advertising tax to file its own refund claim within three years from the date the tax was paid.
Maryland law also provides specific statutory procedures around the administration of the tax, including filing and recordkeeping requirements.
For businesses that paid the tax, this makes the limitation period particularly important. Waiting for the litigation to reach its final conclusion without separately reviewing refund opportunities could create unnecessary risk around potentially expiring claims.
What happens next?
The Maryland decisions are likely to be closely watched by businesses and states beyond Maryland.
The central question is whether the reasoning adopted by the Tax Court will influence challenges to other digital advertising taxes. The answer is not necessarily straightforward.
Different states have adopted different approaches. Their tax bases, thresholds, definitions, exemptions and sourcing provisions may differ materially from Maryland’s structure. As a result, the Maryland decisions do not automatically invalidate taxes imposed elsewhere.
Nevertheless, the decisions provide taxpayers with a concrete set of legal arguments that have now been tested in court.
Illinois
Illinois enacted its own tax on digital advertising and social media in 2026.
The structure shares some features with Maryland’s tax, although it is not identical. The potential exposure therefore needs to be evaluated based on the specific thresholds, definitions and mechanics of the Illinois tax.
Washington
Washington took a different approach by incorporating digital advertising services into its general retail sales tax rather than creating a standalone digital advertising tax.
That difference removes some of the structural features criticised by the Maryland Tax Court. However, Washington’s approach is also facing an ITFA challenge from an affected taxpayer based on reasoning similar to the arguments that succeeded in Maryland.
Utah
Utah’s targeted advertising tax is scheduled to take effect in 2027 and is already facing a legal challenge.
The challenge raises ITFA and Commerce Clause arguments that closely track the reasoning adopted in the Maryland decisions.
Maryland’s outcome therefore raises the bar for states seeking to structure taxes on digital advertising.
For businesses operating across multiple states, the key point is that a Maryland ruling does not automatically eliminate tax obligations elsewhere. Each state’s statute must be reviewed independently.
Actions to Consider
Businesses that have paid digital advertising taxes in Maryland or other states should consider taking a closer look at their position.
1. Assess potential refund claims
Review whether previously paid digital advertising taxes may be eligible for refund, taking into account the applicable limitation period. For Maryland, the alert identifies a three-year period from the date each payment was made.
The Comptroller’s guidance also confirms that taxpayers can use the prescribed refund process for digital advertising gross revenues tax.
2. Review existing claims
Businesses that have already filed refund claims should inventory those claims and evaluate whether the Maryland Tax Court decisions provide additional grounds or supporting arguments.
3. Evaluate financial-statement treatment
While Maryland’s judicial review remains possible, businesses should assess the appropriate reserve and financial-statement treatment associated with the tax and any potential refund claims.
4. Be cautious about stopping tax payments
The Tax Court decisions are significant, but they bind only the three petitioners. With an appeal likely, businesses should carefully evaluate their current filing and payment position rather than assuming that the tax has ceased to apply statewide.
5. Monitor other states
Businesses operating in Illinois, Utah or Washington should track the litigation and assess whether developments in those states could affect their own digital advertising tax positions.
The Maryland ruling is therefore more than a dispute over one state tax. It is a warning for businesses and states that the design of a digital advertising tax matters as much as the policy objective behind it.
For taxpayers, the immediate priority is to identify potential refund opportunities, preserve claims within the applicable limitation periods and continue monitoring the litigation before making changes to ongoing compliance positions.
FAQs
1. What happened to Maryland’s Digital Advertising Gross Revenue Tax?
On August 14, 2026, the Maryland Tax Court held that the tax was unconstitutional and pre-empted by federal law in cases brought by Apple, Google and Peacock TV.
2. Why was Maryland’s digital advertising tax struck down?
The Tax Court found that the tax violated the Internet Tax Freedom Act, the Commerce Clause and the Due Process Clause. In the Peacock TV case, the court also found part of the exemption structure unconstitutional under the First Amendment.
3. Does the ruling automatically apply to every Maryland taxpayer?
No. The decisions are formally binding only on Apple, Google and Peacock TV. Other taxpayers do not automatically receive a refund because of these decisions.
4. Can other businesses seek a refund of Maryland digital advertising tax?
The M2K alert notes that the Comptroller’s existing guidance permits companies that paid the tax to file their own refund claims within three years from the date the tax was paid.
5. Which other states could be affected by the Maryland ruling?
The alert specifically highlights Illinois, Washington and Utah because their digital advertising tax regimes or proposed taxes face legal questions that could overlap with the reasoning adopted in Maryland.
6. Does the Maryland ruling mean digital advertising taxes are invalid everywhere?
No. Each state has its own legislation, definitions, thresholds, tax bases and exemptions. The Maryland decisions provide legal arguments that may be relevant elsewhere, but they do not automatically invalidate other states’ taxes.
About M2K Advisors
M2K Advisors is an international tax advisory firm having offices in India, Singapore, USA & UAE. Our firm offers varied services in USA such as setting up companies in Delaware and other states in USA, tax advisory, tax return filing, state & local tax compliance, sales & use tax compliance, IRS audit representation, FBAR & FATCA filing. M2K Advisors is the specialist firm for businesses managing US tax obligations. Our focused expertise in M&A and cross border structuring, state & local nexus studies, and multi-state compliance makes us the most reliable partner for foreign entities and startups entering the USA market.
Disclaimer: This article is intended for general guidance only and should not be considered tax advice or an opinion. On any specific matter, reference should be made to the appropriate advisor.
