By Jonathan Stempel
(Reuters) -A federal appeals court on Friday declared unconstitutional a Maryland law prohibiting companies that pass on the costs of the state's first-of-its-kind digital advertising tax from telling customers why prices went up.
Reversing a lower court ruling, the 4th U.S. Circuit Court of Appeals unanimously agreed with the Chamber of Commerce and two other trade groups that the restriction violated members' First Amendment free speech rights, while insulating Maryland lawmakers from criticism and political accountability.
The offices of Maryland's Attorney General Anthony Brown and the only defendant, state Comptroller Brooke Lierman, did not immediately respond to requests for comment.
Aimed at larger businesses such as Amazon.com, Meta Platforms' Facebook and Alphabet's Google, Maryland's 2021 law taxed companies that generated at least $1 million of gross revenue from digital ad services in the state.
Maryland imposed levies on a sliding scale based on companies' global revenue, and lawmakers said the tax could raise $250 million annually.
The Chamber of Commerce, NetChoice and the Computer & Communications Industry Association sued, calling the law a punitive assault on digital rather than print advertising.
Friday's decision concerned their objection to a provision against passing on the cost of the tax "by means of a separate fee, surcharge, or line-item," saying it effectively forbade businesses from shifting blame to lawmakers.
Circuit Judge Julius Richardson wrote for a three-judge panel, however, that the provision ensured that companies would bear economic and legal responsibility for the tax. He said Maryland didn't justify this, and the provision was facially unconstitutional.
"The pass-through prevents companies from describing the tax in the one setting where the consumer is guaranteed to look: the invoice," the judge wrote. "Keeping out of hot water with voters is not among the interests that can justify a speech ban."
Richardson added: "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."
The Richmond, Virginia appeals court returned the case to U.S. District Judge Lydia Kay Griggsby in Greenbelt, Maryland, to determine appropriate remedies.
In separate statements, the trade groups welcomed the decision.
"The Fourth Circuit was absolutely correct," said Paul Taske, co-director of the NetChoice Litigation Center. "Maryland tried to prevent criticism of its tax scheme, and the Fourth Circuit recognized that tactic for what it was: censorship."
The case is Chamber of Commerce et al v. Lierman, 4th U.S. Circuit Court of Appeals, No. 24-1727.
(Reporting by Jonathan Stempel in New York; Editing by Andrea Ricci)
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