Maryland Can Tax Internet Advertising, But It Cannot Prevent Advertisers from Disclosing Cost of Tax

The U.S. Court of Appeals for the Fourth Circuit rejects Maryland's attempt to hide the consequences of its internet advertising tax.

On Friday, in Chamber of Commerce v. Lierman,the U.S. Court of Appeals for the Fourth Circuit concluded that Maryland's law barring internet advertisers from disclosing the costs of Maryland's internet advertising tax to their customers, or passing through those costs, violates the First Amendment. Judge Richardson wrote for the court, joined by Judges Floyd and Heytens.

Judge Richardson's opinion begins:

In 1765, the British Parliament imposed a novel tax on the fledgling colonies in North America. The Stamp Act was reviled because it taxed most everything written on paper, from playing cards to newspapers. This not only cost people money but jeopardized their ability to speak on matters of public concern. John Adams roused Massachusetts against the tax, calling it an "enormous Engine . . . for battering down all the Rights and Liberties of America." 1 The Adams Papers 263 (L.H. Butterfield ed., 1961). Thousands of citizens protested when the dreaded stamps arrived in Charleston harbor, besieging the stamp officers in Fort Johnson for nine days. D.D. Wallace, Constitutional History of South Carolina From 1725 To 1775 at 32–33 (1899). And across the colonies, outrage about the tax prompted the colonists to begin developing the arguments that would later form the Declaration of Independence. See generally Daniel Dulany, Considerations on the Propriety of Imposing Taxes in the British Colonies (1765). In more ways than one, the Stamp Act and other taxes like it ignited revolution.

Two and a half centuries later, the State of Maryland imposed another tax—not on those who print pamphlets but their internet-age successors. This tax applies to the money made by advertising on the internet. But as some things have changed, others have remained the same. It is no less true today than centuries ago that "the power to tax involves the power to destroy." M'Culloch v. Maryland, 17 U.S. (4 Wheat) 316, 431 (1819). And complaining about taxes remains a grand American political tradition.

Perhaps fearing such complaints, Maryland paired its tax with another rule. Companies that make money advertising on the internet must not only pay the tax but avoid 3 telling their customers how it affects pricing: No line items, no surcharges, no fees. If companies pass on the cost of the tax, they must do so in silence—keeping customers in the dark about why prices have gone up and thereby insulating Maryland from political responsibility.

That provision is the subject of this appeal. Plaintiffs, a group of trade associations, challenge Maryland's rule on grounds that it abridges their freedom to speak. They say Maryland has no reason, other than insulating themselves from criticism and political accountability, to forbid them to explain the tax to their customers. We agree. As much today as 250 years ago, criticizing the government—for taxes or anything else—is important discourse in a democratic society. The First Amendment forbids Maryland to suppress it.

Key to the court's analysis is its conclusion that, in operation, the Maryland law regulates speech--what companies tell their customers about the prices they charge--more than conduct. The court does not resolve whether the law regulates purely commercial speech, but concludes that such an analysis is unnecessary because the law could not survive intermediate scrutiny.

The opinion concludes:

The states are free to make controversial policy. That is part of our federalist bargain. See Gregory v. Ashcroft, 501 U.S. 452, 458 (1991). 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.