Maryland Supreme Court Delays Inevitable Fate of Digital Ad Tax

In Comptroller v. Comcast of California, the Maryland Supreme Court on July 12 supported an earlier order finding that the litigants—a group of taxpayers—couldn’t use a declaratory judgment motion to decide the fate of Maryland’s landmark digital advertising tax.

As a result, the tax’s validity will remain undecided until a taxpayer either pays the tax and files a refund claim or doesn’t pay the tax and challenges an assessment—several years after which the state Supreme Court inevitably will be asked again to decide the issue on an identical record.

Is it fair or efficient for either party to sit in economic limbo for several more years? Could this really be what the Maryland legislature intended?

The state Supreme Court manipulated its malleable statutory construction rules and ignored taxpayers’ sensible public policy argument. It concluded that the legislature intended for the parties to incur several more years of administrative and financial costs before returning to adjudicate the same substantive issue on virtually the same record.

The sole issue before the court was whether Maryland law required taxpayers to exhaust their administrative remedies in lieu of bringing a declaratory judgment challenging a tax statute’s constitutionality. The court reinterpreted Maryland law to roll back the availability of the constitutional exception to exhaustion.

The court held that the Maryland legislature actually intended to foreclose the availability of the exception by concluding that its precedent “consistently treated the special statutory administrative remedies for the determination of tax questions to be exclusive or primary.” It added that the “comprehensive nature of the special statutory administrative remedies available for resolving tax disputes suggests that the General Assembly intended them to be either exclusive or primary rather than concurrent.”

The court’s choice to include more than a full-page, single-spaced quote from Comptroller v. FC-GEN Operations Invs. LLC underscores the flexibility it has granted itself to interpret a statute to achieve a desired outcome.

In determining whose interpretation of Section 13-505 of Maryland’s tax code to accept, the court resorted to “familiar canons of statutory interpretation” to ascertain and effectuate the intention of the legislature. The court began with, but didn’t confine itself to, the statute’s plain meaning by proceeding to consider: the statute “as a whole,” how the structure of the statute relates to other laws, and its general purpose—all to evaluate the “competing constructions” to discern a reasonable interpretation.

Stating the obvious, the court acknowledged that it couldn’t render an interpretation that would be “absurd, illogical, or incompatible with common sense.” The court concluded by adding a veneer of impartiality by “recognizing that any ambiguity within the statutory language must be interpreted in favor of the taxpayer.”

Distilled to its simplest form, the state Supreme Court has established for itself a statutory construction test with maximum flexibility. That said, the court’s conclusion that to rule in favor of the taxpayers “would permit an end-run around the legislative intent” arguably requires an ambiguous statute to be interpreted in the taxpayer’s favor.

The court left arguments unaddressed. First, it noted that that the “General Assembly has discretion to decide whether to require taxpayers to exhaust their administrative remedies,” but it didn’t provide any rationale for why the legislature didn’t include declaratory judgments in the list of processes barred in tax cases.

More importantly, the court didn’t explain why it didn’t reach a decision that would serve the abundantly sensible “public policy argument that it is far better” to resolve this issue by way of declaratory judgment “before the tax is assessed and before taxpayers pay millions of dollars in tax only for the State to have to refund those amounts” in the future.

The court subjectively bent its statutory construction rules to bow before the altar of legislative intent. This choice is even more curious when one considers that the court has repeatedly exercised its discretion to conclude that Maryland statutes intend to tax “so much of a corporation’s net income as is constitutionally permissible” in the absence of express legislative intent. (See Xerox Corp. v. Comptroller of Treasury, NCR Corp. v. Comptroller of Treasury, and Comptroller of Treasury v. SYL, Inc.)

This case creates additional financial uncertainty and administrative costs for taxpayers and the comptroller without protecting any legislative or other interest. Therefore, it wouldn’t be surprising if the Maryland legislature were to enact legislation changing the outcome of this case so that the damage incurred isn’t repeated.

The case is: Comptroller v. Comcast of California, Md., No. 32, 2023 BL 237287, 7/12/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mike Semes is of counsel at BakerHostetler and is a professor of practice at Villanova University Charles Widger School of Law in the graduate tax program.

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