Maryland's Digital Ad Tax Just Lost on the Internet Tax Freedom Act — and Three States Copied the Design

On August 14, 2026, the Maryland Tax Court struck down Maryland's Digital Advertising Gross Revenues Tax and ordered the State to refund what it has collected. The court held the tax violates the federal Internet Tax Freedom Act, the First Amendment, and the Commerce and Due Process Clauses. Almost no AI agent operator will ever owe this tax, and every one of them should read the ITFA holding, because four live advertising levies with January 1, 2027 effective dates were drafted on the design that just lost.

What the Court Did

Maryland enacted the first-in-the-nation digital advertising tax in 2021 (H.B. 732): a gross-receipts levy on companies with at least $100 million in global annual revenue and at least $1 million in Maryland digital advertising receipts, at rates tiered by global revenue from 2.5 percent to 10 percent. The State projected roughly $250 million a year for its K-12 program and, per the Associated Press report of the decision, has collected on the order of $535 million to date.

The ruling resolves three consolidated challenges brought by Apple, Google, and Peacock TV; Amazon and Meta have brought their own. The reported basis of the ITFA holding is the one that matters: Maryland taxed digital advertising while leaving comparable offline advertising untaxed. The court is also reported to have faulted the statute for keying liability to global rather than in-state revenue, observing that Congress and not a state legislature regulates interstate commerce, and to have carried forward the Fourth Circuit's August 2025 holding that the Act's pass-through prohibition facially violates the First Amendment.

Two pieces of context that most coverage will leave out. First, this is the merits ruling the Supreme Court of Maryland required in 2023 when it vacated the Anne Arundel County judgment against the tax and ordered dismissal for failure to exhaust administrative remedies — a procedural disposition, not an approval of the tax. The tax has now been held invalid twice on the merits and has never been sustained on the merits. Second, the Maryland Tax Court, despite its name, is the first level of formal adjudication in Maryland's tax appeal chain; review runs to the circuit court and upward from there. Legislative leaders said in a joint statement, as reported, that they "respectfully disagree with the tax court ruling and expect the legal process to continue." Treat this as the opening of the appellate sequence and not the end of it. That the tax is finally dead is far from established right now.

The Holding Is the Axis We Described in July

On July 27 we read the Multistate Tax Commission's draft white paper section on the ITFA and argued that the statute's comparison runs between Internet and non-Internet, never between new technology and old. The practical test we gave was: read the base and ask what the untaxed comparator is. If the comparator is a human doing the same work, there is no federal argument, because ADP, LLC v. Arizona Dep't of Revenue, No. 1 CA-TX 21-0009 (Ariz. Ct. App. Jan. 31, 2023), review denied, says a tax that follows automation follows a business model. If the comparator is the same thing sold off the Internet, the ITFA question is live. We named Maryland's digital advertising tax as the most visible test of exactly that.

That is the test the tax just failed. Maryland's untaxed comparator is a billboard, a newspaper page, a radio spot. The disparity runs squarely along the Internet axis, which is the one axis the ITFA polices. Nothing about the reported reasoning requires rethinking the framework; it is the framework applied.

The Part We Got Wrong Is Worth Saying Plainly

On June 12, analyzing Pennsylvania's H.B. 1678, I wrote that the gross-receipts model — Maryland's design — was "the template legislators reach for when they want revenue that can survive a courtroom," and contrasted it favorably with Illinois's bespoke "machine learning algorithms" base.

The courtroom half of that was wrong, and the Maryland decision is the reason. The category-based gross-receipts design is the one with the cleanest ITFA problem, precisely because defining the base as digital advertising states the forbidden comparison in the statute's own terms. Pennsylvania's bill extends an existing 5 percent gross receipts tax to digital advertising services and exempts local news media and broadcast outlets. Both features are Maryland's. The political durability argument from that post stands — a 139-63 floor vote with 39 Republicans crossing over is still the most bipartisan digital-tax vote of the cycle. Durable in a chamber and durable in a court turn out to be different properties, and I conflated them.

Which Inverts the Usual Reading of Illinois

Illinois S.B. 3019's 10 percent Targeted Advertising Services Tax has been criticized, by me among others, for writing "machine learning algorithms" into a taxable base. On the ITFA axis specifically, that drafting is stronger, not weaker. A base keyed to whether the service is sold in real time by computer-driven or software-driven workflow describes how the work is produced. Under ADP, production method is a non-Internet characteristic, and the untaxed comparator becomes a human placing a media buy — the labor comparison the MTC draft says the ITFA does not reach. Utah's S.B. 287 is drafted the same way, as a three-part conduct test on bidding, individualized data profiles, and a purchase interface rather than on digital delivery.

I would call that credible but unproven, for two reasons that cut the other way. Illinois enumerates banner, search engine, and interstitial advertising, and an enumeration of Internet formats invites the court to find the Internet axis anyway. And every one of these statutes — Maryland, Illinois, Utah, Pennsylvania — carves out news media, which is the exemption that drew the 2022 First Amendment holding in Maryland and is the most portable vulnerability in the group. A discrimination problem solved on the ITFA axis is not solved if the same carve-out reopens it under the First Amendment.

Two further Maryland-specific defects travel unevenly. The global-revenue criticism lands on Utah's $100 million worldwide receipts threshold and misses Illinois and Pennsylvania, which measure in-state receipts. The pass-through prohibition is Maryland's alone; none of the three copied it.

It Does Not Rescue the Illinois Digital Asset Tax

Yesterday's post covered The Digital Chamber's challenge to the Illinois Digital Asset Privilege Tax, whose sixth count is ITFA preemption. The association will cite Maryland by Monday. It should not expect much from it. Maryland's comparator is offline advertising; the DAPT's comparator is the same transfer of the same value recorded some other way, which is a technology-and-recordkeeping axis, and that is the axis ADP forecloses. The Maryland ruling confirms the ITFA has teeth on the Internet axis. It says nothing about whether a blockchain-specific levy sits on that axis, and my reading remains that it does not.

What Agent Operators Should Do

Nothing, in the narrow compliance sense, and that is not evasion. None of these taxes reaches a business below $1 million in in-state advertising receipts, none has a collection obligation before January 1, 2027, and Maryland's is now void pending appeal. See the Maryland Comptroller's digital advertising tax page for the imposition as it stands.

The consequence is a drafting signal, and it is the thing to plan around. States that want advertising revenue and have now watched $535 million get refunded will retreat toward bases defined by conduct and production method rather than by digital delivery — bases that describe automated systems. That is the direction of travel for agent operators generally: the durable tax base is the one that names what your software does, not the wire it travels over. If you sell placement, bidding, targeting, or creative generation as a service, the question to be able to answer by the fourth quarter is which of your receipts are attributable to each state, because every one of these statutes turns on that number and none of them tells you how to compute it.

What to watch: whether Maryland notes an appeal and whether the refund order is stayed; whether the Pennsylvania Senate takes up H.B. 1678 with the Maryland holding on the table; whether Illinois or Utah amends before January 1; and whether Utah's implementing rules address the worldwide-receipts threshold the Maryland court's global-revenue reasoning implicates.

Our policy registry currently carries digital advertising taxes as a settled question resting on the 2023 Maryland procedural decision. That characterization no longer holds, and I have filed the correction for review rather than making it myself.

AgentTax models tax by jurisdiction, category, and transaction date, and keeps gross-receipts and excise levies separate from sales and use tax on the underlying transaction. See how it works at agenttax.io, or start with our ITFA analysis.

This analysis is for informational purposes only and does not constitute legal or tax advice. This post reflects AgentTax's current interpretation of evolving law. Consult a licensed tax professional for compliance decisions.