Chamber of Commerce of the United States v. Franchot

• Decision Date: 30 March 2022
• Docket Number: Civil Action No. 21-cv-00410-LKG
• Citation: 595 F.Supp.3d 423
• Parties: CHAMBER OF COMMERCE OF the UNITED STATES of America, et al., Plaintiffs, v. Peter FRANCHOT, et al., Defendants.
• Court: U.S. District Court — District of Maryland

595 F.Supp.3d 423

CHAMBER OF COMMERCE OF the UNITED STATES of America, et al., Plaintiffs,

v.Peter FRANCHOT, et al., Defendants.

Civil Action No. 21-cv-00410-LKG

United States District Court, D. Maryland.

Signed March 30, 2022

Filed March 31, 2022

Michael B. Kimberly, Paul Whitfield Hughes, Sarah P. Hogarth, Pro Hac Vice, Stephen P. Kranz, Pro Hac Vice, McDermott Will and Emery LLP, Washington, DC, Jennifer Dickey, Pro Hac Vice, Tara Morrissey, Pro Hac Vice, U.S. Chamber Litigation Center, Washington, DC, for Plaintiff Chamber of Commerce of the United States of America.

Michael B. Kimberly, Paul Whitfield Hughes, Sarah P. Hogarth, Pro Hac Vice, Stephen P. Kranz, Pro Hac Vice, McDermott Will and Emery LLP, Washington, DC, for Plaintiffs Internet Association, NetChoice, Computer & Communications Industry Association.

Julia Doyle Bernhardt, Steven M. Sullivan, Maryland Office of the Attorney General, Civil Litigation Division, Baltimore, MD, Brian Lee Oliner, Maryland Office of the Attorney General, Annapolis, MD, for Defendants.

Aman Tewari George, Pro Hac Vice, Samara M. Spence, Pro Hac Vice, Democracy Forward Foundation, Washington, DC, Patrick Andrew Thronson, Janet Janet and Suggs LLC, Baltimore, MD, for Amici Young Ran (Christine) Kim, Darien Shanske.

MEMORANDUM OPINION AND ORDER¹

LYDIA KAY GRIGGSBY, United States District Judge

I. INTRODUCTION

This case involves statutory and constitutional law challenges to the State of Maryland's Digital Ad Tax Act, 2021 Md. Laws ch. 37, codified at Title 7.5 of the Tax-General Article, (the "DATA") brought by four trade associations who have members who will be liable for the charge imposed by this statute. See generally Am. Compl., ECF No. 25. Defendant has moved to dismiss this matter pursuant to Fed. R. Civ. P. 12(b)(1) and (6) for several reasons, including that plaintiffs’ claims are jurisdictionally precluded by the Tax Injunction Act, 28 U.S.C. § 1341, and principles of tax comity. Def. Mot., ECF No. 29; Def. Mem., ECF No. 29-1. Plaintiffs have also moved for summary judgment in their favor on issues related to their statutory and constitutional law claims. Pl. Mot., ECF No. 31; Pl. Mem., ECF No. 31-1. For the reasons set forth below, the Court GRANTS-in-PART and DENIES-in-PART defendant's motion to dismiss.

II. FACTUAL AND PROCEDURAL BACKGROUND²

A. Factual Background

In this civil action, plaintiffs, the Chamber of Commerce of the United States of America, the Internet Association, NetChoice and the Computer & Communications Industry Association, bring statutory and constitutional law challenges to the State of Maryland's Digital Ad Tax Act, or "DATA." See generally Am. Compl. Specifically, plaintiffs allege in Counts I, II and III of the amended complaint that the DATA: (1) violates the Internet Tax Freedom Act, 47 U.S.C. § 151 (Count I); (2) violates the Commerce Clause (Count II); and (3) violates the Due Process Clause (Count III). See id. at ¶¶ 76-93. In addition, plaintiffs allege in Count IV of the amended complaint that the DATA's provision that prohibits passing on the costs of the DATA's charge violates the Commerce Clause and the First Amendment. Id. at ¶¶ 94-96.

The Maryland Digital Ad Tax Act

As background, the DATA imposes a charge on a business's annual gross revenues derived from digital advertising services provided in the State of Maryland, if the business has at least $100 million in global annual gross revenues. See Md. Code Ann., Tax-Gen. §§ 7.5-102 to -103. Under the DATA, " ‘[d]igital advertising services’ include[ ] advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services." Id. at § 7.5-101(e)(1).

The tax rate under the DATA is graduated in increments of 2.5%, from 2.5% to 10%, based upon the global annual gross revenues of the business. See Md. Code Ann., Tax-Gen. § 7.5-103.³ In addition, the DATA requires that "[t]he Comptroller ... adopt regulations that determine the state from which revenues from digital advertising services are derived." Id. at § 7.5-102(b)(2).

In 2021, the Maryland General Assembly adopted certain amendments to the DATA, which: (1) exclude advertising services on digital interfaces owned or operated by a broadcast entity, or news media entity and (2) prohibit a covered taxpayer from directly passing on the cost of the digital ad tax to a purchaser of digital advertising services. See 2021 Md. Laws ch. 669, § 1 (S.B. 787) (amending Md. Code Ann., Tax-Gen. §§ 7.5-101 to -102). The so-called "pass-through" prohibition in the DATA, as amended, provides that: "[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." See Md. Code Ann., Tax-Gen. § 7.5-102(c).

The proceeds collected via the DATA's charge are distributed to the Blueprint for Maryland's Future Fund. See Md. Code Ann., Tax-Gen. § 2-4A-02. This fund is used to pay for a comprehensive package of improvements that are intended to "transform Maryland's education system to world-class student achievement levels." See Md. Code Ann., Educ. § 1-301(a).

Methods For Challenging A Tax Under Maryland Law

Maryland law affords two methods for a taxpayer to raise an objection to a tax, including a state or federal constitutional challenge.

First, the so-called "post-deprivation remedy" allows a taxpayer to first pay the disputed tax and then seek a refund. See Md. Code Ann., Tax-Gen. § 13-901(a) ("A claim for refund may be filed with the tax collector who collects the tax, fee, or charge by a claimant who: (1) erroneously pays to the State a greater amount of tax, fee, charge, interest, or penalty than is properly and legally payable; [or] (2) pays to the State a tax, fee, charge, interest, or penalty that is erroneously, illegally, or wrongfully assessed or collected in any manner."). If a post-deprivation remedy is pursued, the Comptroller will "(1) investigate each claim for refund; and (2) conduct a hearing at the request of the claimant prior to a final determination on the claim." See id. at § 13-904(a).

Thereafter, the Comptroller issues a notice of "the determination of the claim for refund." Id. at § 13-904(b). Maryland law also provides that, if the taxpayer disagrees with the Comptroller's determination, or if the Comptroller does not issue its determination within six months after filing the claim, the taxpayer can appeal to the Maryland Tax Court. Id. at § 13-510(a)(6) ("[W]ithin 30 days after the date on which a notice is mailed, a person or governmental unit that is aggrieved by the action in the notice may appeal to the Tax Court from: ... (6) a disallowance of a claim for refund under § 13-904 of this title."); id. at § 13-510(b) ("If a tax collector does not make a determination on a claim for refund within 6 months after the claim is filed, the claimant may: (1) consider the claim as being disallowed; and (2) appeal the disallowance to the Tax Court.").

A second option is for a taxpayer to pursue the so-called "pre-deprivation remedy" under Maryland law, which allows a taxpayer to challenge a tax before paying the tax. Id. at § 13-401 ("[I]f a tax collector examines or audits a return and determines that the tax due exceeds the amount shown on the return, the tax collector shall assess the deficiency."). This remedy is available if the Comptroller determines that a taxpayer did not pay tax that was due and issues an assessment. Id. A taxpayer may choose to contest such an assessment by filing an appeal directly with the Maryland Tax Court. Id. at § 13-510(a)(1) ("[W]ithin 30 days after the date on which a notice is mailed, a person or governmental unit that is aggrieved by the action in the notice may appeal to the Tax Court from: (1) a final assessment of tax, interest, or penalty under this article[.]"); see also Comptroller v. Phillips , 384 Md. 583, 865 A.2d 590, 594 n.5 (2005) ("§ 13–510(a)(1) of the Tax–General Article authorizes a person aggrieved by a tax assessment to appeal to the Tax Court.").

In this regard, Maryland law provides that "[t]he [Maryland] Tax Court shall have full power to hear, try, determine, or remand any matter before it" and that the Maryland Tax Court "may reassess or reclassify, abate, modify, change or alter any valuation, assessment, classification, tax or final order appealed to the Tax Court." Md. Code Ann., Tax-Gen § 13-528(a). The Maryland Tax Court can also abate penalties and interest on an assessment. See, e.g. , Frey v. Comptroller , 422 Md. 111, 29 A.3d 475, 519 (2011) (stating that the Maryland Tax Court is authorized to abate assessed interest for "reasonable cause" or "an obvious error").

Lastly, Maryland law provides for judicial review of the determinations of the Maryland Tax Court to the Circuit Court of Maryland in both pre-deprivation and post-deprivation cases. Md. Code Ann., Tax-Gen. § 13-532(a)(2). A judgment of the Circuit Court of Maryland is also appealable by right to Maryland's Court of Special Appeals, with discretionary review by the Maryland Court of Appeals available via writ of certiorari. See Md. Code Ann., Cts. & Jud. Proc. §§ 12-201, 12-301, 12-307 and 12-308.

B. Procedural Background

Plaintiffs commenced this action on February 18, 2021. See Compl., ECF No. 1. On April 30, 2021, plaintiffs filed an amended complaint. See Am. Compl.

On June 15, 2021, defendant filed a motion to dismiss the amended complaint, pursuant to Fed. R. Civ. P. 12(b)(1) and (6), and a memorandum in support thereof. See Def. Mot; Def. Mem. On July 29, 2021, plaintiffs filed a response in opposition to defendant's motion to dismiss and a motion for summary judgment, pursuant to Fed. R. Civ. P. 56. See Pl. Mot.; Pl. Mem.

On September 13, 2021 defendant filed a reply in support...