Maryland must allow digital advertising taxpayers to separately state the amount of tax that is passed through to customers, so concludes a federal appeals court in a published opinion. Chamber of Commerce of the U.S. et. al. v. Lierman, No. 24-1727 (U.S. Ct. App., 4th Cir. Aug. 15, 2025). The law is clear that if a government imposes a tax on a company that may be passed through to customers, the U.S. Constitution’s First Amendment protects the company’s right to explain the tax to its customers. Government is not permitted to hide the tax burdens that it imposes.
Maryland is the first U.S. state to impose a tax on revenues that companies produce by advertising on the internet. It applies to companies that generate at least $100 million in global annual gross revenue and taxes the annual gross revenue. Further, via a clean-up bill, the statute imposing the tax provides: “A person who derives gross revenues from digital advertising services in the State may not directly pass on the cost of the tax imposed under this section to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item.” Md. Code, Tax-Gen. § 7.5-102(c) (the “Passthrough Provision”). The Legislative history reveals that the purpose of the Passthrough Provision was to prevent companies that are subject to the tax from “simply pass[ing] the cost along to already struggling Maryland businesses, rather than absorb the cost of the tax.”
Various companies and trade groups attacked the tax inasmuch as there is much in the tax that is subject to challenge. Several challenges were argued at the Maryland Tax Court during the week of July 28, 2025, including claims under the Internet Tax Freedom Act and, as of the date of this writing, decisions are still pending. However, the recent decision from the U.S. Court of Appeals is narrowly focused on the Passthrough Provision. The Chamber of Commerce plaintiffs asserted that the Passthrough Provision is a content-based restriction on political speech that violates the First Amendment because it forbids them from explaining the tax to their customers and thus places political responsibility for price increases with Maryland and asserted, alternatively, that the provision unlawfully restricted commercial speech.
The Court observed that the Passthrough Provision prohibits passing through the tax by “separate” fees, surcharges, or line-items. The Court ruled that such prohibitions restrict the way that a price increase resulting from the tax can be communicated to customers. It reasoned that companies are permitted to pass the tax through to customers but are not permitted to tell the customers that there is a passthrough by separately stating a fee, surcharge, or line-item. Therefore, a company may only pass the tax through to customers in silence.
Maryland attempted to distinguish the Passthrough Provision as a prohibition from conduct—that the law prohibited the act of collecting the tax directly from customers and did not prohibit speech—to pass First Amendment muster. The Court was unmoved and reasoned that the incidence of the tax is on the company, not the customer, so a company is not passing through the incidence of the tax. A company is only stating the amount of increase in the invoice that the customer pays due to the tax, which is speech.
Maryland also tried to support the Passthrough Provision by asserting that it only prohibited commercial speech, which is subject to a lower threshold (intermediate scrutiny, that the law directly advances a substantial government interest and imposes a burden no more extensive than is necessary). The Court observed that an invoice calling attention to the Maryland tax was not inviting a commercial relationship. It was indeed akin to complaining about taxes, which the Court found “is among the oldest of American political traditions.” Therefore, the Passthrough Provision should be subject to a more difficult test (strict scrutiny, that the government demonstrate that the restriction furthers a compelling interest and is narrowly tailored to achieve the interest) in order to survive. The Court ruled that Maryland cannot survive either test because the obvious purpose of the Passthrough Provision is to make companies responsible for the tax while not permitting them to tell their customers the answer to the question: “Why have prices been raised?”
The Court held that Maryland’s clamp on a company’s ability to speak about the tax and the source of its burden on the customer fails the First Amendment of the U.S. Constitution on its face (that is, the challenge survives without waiting for an invoice itself to be generated and prohibited). The Court reversed the U.S. District Court’s decision and remanded the case for the District Court to construct a remedy. However, before ending its decision, it issued a parting shot at Maryland, stating that: “The states are free to make controversial policy.… But with that freedom comes constraint. States may not forbid regulated parties to talk about their regulations unless they withstand First Amendment scrutiny. Maryland’s pass-through provision does not.”
The Takeaway: Government should freely admit the burdens it creates and cannot prevent taxpayers or purported taxpayers from complaining about taxes!
This update is one in a series of updates written for the September 2025 edition of The BR State + Local Tax Spotlight.
© 2025 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
