A recent tax court ruling in Maryland pours cold water on a tax proposal championed in Michigan by Gov. Gretchen Whitmer. The Maryland Tax Court struck down that state’s first-in-the-nation digital advertising tax, ruling that it violated the federal Internet Tax Freedom Act, as well as the interstate commerce and due process clauses of the U.S. Constitution. Lawsuits have also been filed in Utah and Illinois, which adopted their own digital advertising taxes earlier this year.
Whitmer included a 4.7% excise tax on digital advertising in her budget proposal this year. The measure did not make it into the final package, due to criticism of its economic implications and concern that it would not hold up in court. The Maryland Tax Court’s decision underscores the latter concern, offering Michigan lawmakers a preview of the legal challenges they would face if Michigan were to adopt a digital ad tax.
The governor’s budget proposal lacked specifics, but House Bill 4142 of 2025 offered one possible approach, drawing heavily on the law just struck down in Maryland. That bill includes all the provisions that led a Maryland court to invalidate the tax on multiple grounds.
Under both the Michigan bill and the struck-down Maryland law, the tax base is revenue companies receive from in-state advertising. But the tax rate, which ranges from 2.5% to 10%, is based on the advertising platform’s worldwide revenue. This means the amount of tax owed is largely determined by factors entirely outside the state. Liability under both the Maryland tax and the Michigan proposal is also based on a global revenue threshold. The Maryland Tax Court held that using out-of-state revenues to determine tax liability violated both the commerce clause and the due process clause.
The court concluded that the tax has other defects: It is not fairly apportioned, it discriminates against interstate commerce by specifically targeting out-of-state companies, and that there is no fair relationship between the tax and services the company receives from the state. In short, the tax violates three of the four prongs of the Complete Auto test that governs a tax’s constitutionality under the commerce clause. The court also ruled that there was no rational relationship between the income the tax attributes to the state and the interstate values of the taxed entities, violating the due process clause.
Michigan could sidestep some of these challenges could be sidestepped if lawmakers choose not to bring foreign revenues into its tax calculations. But other commerce clause challenges could remain. Even if other provisions are modified, for instance, exemptions for newspapers and broadcast media (as Whitmer proposed and is in HB 4142) functionally exclude in-state taxpayers, leaving only out-of-state payers. Discriminatorily defining a tax base that only includes out-of-state taxpayers violates the commerce clause. Michigan’s biggest hurdle, however, is the Internet Tax Freedom Act (ITFA), a federal law.
Under that law, states are prohibited from imposing discriminatory taxes on electronic commerce. They may not impose taxes on digital transactions that are not generally imposed on transactions involving “similar” property, goods, services, or information “accomplished through other means.” A state could not, for instance, tax a streaming fitness class if it did not impose a similar tax on fitness classes at a local gym. And it cannot tax digital advertising if it does not tax offline advertising platforms, including television, radio, billboards, and direct mail ads.
Digital ad tax proponents have argued that digital advertising is not similar to offline advertising, citing its targeting and tracking capabilities. This divide is not as stark as proponents make it out to be, though: Direct mail is also highly programmatic, targeted, and tracked. The Maryland court correctly emphasized the importance of similarity of purpose. Advertising consists of paid messages to attract business.
The Maryland Tax Court also made quick work of several other arguments advanced to shield the state’s digital ad tax from the federal ban on discriminating against online advertising. Maryland attempted to argue that the federal law was itself unconstitutional under the anti-commandeering doctrine, which prohibits the federal government from forcing states to enforce or administer federal laws or regulations. State officials pointed to Murphy v. NCAA, in which the Supreme Court held that Congress cannot compel state legislatures to prohibit collegiate sports betting. The digital ad tax’s proponents attempted to argue that Congress is likewise prohibited from limiting states’ taxing powers. But the comparison is not valid. As the Maryland Tax Court noted, regulating gambling is not a plenary power granted to Congress by the Constitution. Regulating interstate commerce is.
Maryland also appealed to the presumption against preemption, a principle that courts should not presume that federal laws override state powers unless Congress clearly says so. But this is the clear intent of the Internet Tax Freedom Act. It is a preemption statute, prohibiting states from imposing discriminatory taxes on e-commerce, and Maryland’s Tax Court easily swatted away the presumption against preemption.
The decision of a Maryland tax court does not bind courts in Michigan, but lawmakers can’t ignore the case’s significance. Even if a future Michigan tax proposal were designed to avoid some of the pitfalls of HB 4142, any tax on digital advertising would run headlong against federal law. And when that happens, Michigan’s courts are extremely likely to reach the same conclusions.
There are still appeals to go in Maryland, but the outcome is not in serious doubt. Eventually, Maryland will be forced to refund years of tax collections — with interest. Michigan can learn from Maryland’s experience, avoiding the costly and ultimately futile legal battles that adopting a digital advertising tax would invite.
