USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 1 of 16
PUBLISHED
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
No. 22-2275
CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA; NETCHOICE; COMPUTER & COMMUNICATIONS INDUSTRY ASSOCIATION,
Plaintiffs - Appellants,
v.
BROOKE E. LIERMAN
Defendant - Appellee.
Appeal from the United States District Court for the District of Maryland, at Baltimore. Lydia Kay Griggsby, District Judge. (1:21-cv-00410-LKG)
Argued: September 20, 2023 Decided: January 10, 2024
Before RICHARDSON and HEYTENS, Circuit Judges, and FLOYD, Senior Circuit Judge.
Affirmed in part, vacated in part, and remanded with instructions by published opinion. Senior Judge Floyd wrote the opinion in which Judge Richardson and Judge Heytens joined.
ARGUED: Michael B. Kimberly, MCDERMOTT, WILL & EMERY, LLP, Washington, D.C., for Appellants. Julia Doyle Bernhardt, OFFICE OF THE ATTORNEY GENERAL OF MARYLAND, Baltimore, Maryland, for Appellee. ON BRIEF: Tara S. Morrissey, Jennifer B. Dickey, Tyler S. Badgley, UNITED STATES CHAMBER LITIGATION CENTER, Washington, D.C., for Appellant Chamber of Commerce of the United States of USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 2 of 16
America. Sarah P. Hogarth, Charles Seidell, MCDERMOTT WILL & EMERY LLP, Washington, D.C., for Appellants. Anthony G. Brown, Attorney General, Steven M. Sullivan, Assistant Attorney General, OFFICE OF THE ATTORNEY GENERAL OF MARYLAND, Baltimore, Maryland, for Appellee.
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FLOYD, Senior Circuit Judge:
The United States Chamber of Commerce and three other trade associations sued in
federal court to stop the enforcement of a new state tax in Maryland. Under the challenged
law, called the Digital Advertising Gross Revenues Tax Act (“the Act”), large technology
companies pay a tax based on gross revenue they earn from digital advertising in the state.
By way of example, when Google displays sponsored links on its search results, the Act
taxes a percentage of the revenue that Google makes from those advertisements.
The complaint alleged the Act violates the Internet Tax Freedom Act (Count I), the
Commerce Clause (Count II), the Due Process Clause (Count III), and the First
Amendment (Count IV). The district court dismissed Counts I, II, and III with prejudice
as barred by the Tax Injunction Act (“TIA”). The TIA prevents federal courts from
enjoining the collection of state taxes when state law provides an adequate remedy. The
district court dismissed Count IV without prejudice on mootness grounds after a state trial
court declared the Act unconstitutional in a separate proceeding. While this appeal was
pending, the Maryland Supreme Court vacated that declaratory judgment.
We affirm the part of the district court’s judgment that found Counts I–III barred by
the TIA, but we vacate the judgment to the extent it dismissed Counts I–III with prejudice
and remand with instructions to enter the dismissal without prejudice. As for Count IV,
we vacate the court’s judgment and remand for further proceedings.
I.
The Act imposes a tax on businesses that provide digital advertising in Maryland
and have at least $100 million in global annual gross revenues. Md. Code Ann., Tax-Gen.
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§§ 7.5-102, 7.5-103. The tax is imposed on a business’s “annual gross revenues derived
from digital advertising services in [Maryland].” § 7.5-101(c). The tax is graduated based
on the business’s aggregate size, but broadcast and news media entities of all sizes are
exempt. §§ 7.5-101(e)(2), 7.5-103. Businesses with global annual gross revenues of $100
million to $1 billion are taxed at 2.5%, those with $1 billion to $5 billion are taxed at 5%,
those with $5 billion to $15 billion are taxed at 7.5%, and those with more than $15 billion
are taxed at 10%. § 7.5-103. The tax proceeds are first used to pay for the administration
of the Act, and the remainder are placed in the “Blueprint for Maryland’s Future Fund,”
which supports public education and career readiness programs. §§ 2-4A-01, 2-4A-02.
The Act prohibits the taxed companies from passing on the costs of the tax to their
advertising customers “by means of a separate fee, surcharge, or line-item.” § 7.5-102(c).
We refer to this prohibition as the “pass-through provision” in this opinion.
The Chamber of Commerce of the United States, Internet Association, NetChoice,
and Computer & Communications Industry Association (collectively, “Plaintiffs” or
“Appellants”) 1—sued Maryland’s Comptroller of the Treasury (“Maryland”) in the U.S.
District Court for the District of Maryland for declaratory and injunctive relief. Count I of
their amended complaint alleged that the Act is preempted by the Internet Tax Freedom
Act, which prohibits states from imposing “discriminatory taxes on electronic commerce.” 2
Counts II and III alleged that the tax violates the dormant Commerce Clause and Due
Process Clause because it “punishes” extraterritorial conduct. Count IV alleged that the
1 Internet Association, a plaintiff below, is not participating in this appeal. 2 47 U.S.C. § 151 note. 4 USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 5 of 16
pass-through provision, if “interpreted to prohibit companies from including a separate fee,
surcharge, or line-item on bills, invoices, receipts, or the like,” violates the First
Amendment as a content-based regulation of speech. Joint Appendix (“J.A.”) 33.
Appellants argue the Act was designed to punish a select group of “massive
technology companies” like Amazon, Facebook, and Google. They say the Act is
“unusual” and “punitive” in many respects: it is assessed based on gross receipts as
opposed to net receipts (unlike corporate income taxes), it exacts “enormous” charges, it
targets “exceedingly few” companies, and it is based on “extraterritorial conduct” rather
than conduct within Maryland. Because the Act considers all of a company’s revenues
from inside and outside Maryland and because it applies to gross as opposed to net receipts,
even companies that are not turning a profit could be taxed many times more than even
their corporate income taxes in Maryland would impose.
Maryland moved to dismiss the complaint as barred by the TIA and for failing to
state a claim on the merits. The Plaintiffs cross-moved for summary judgment. The district
court ordered supplemental briefing and held a hearing on the applicability of the TIA. The
court sided with Maryland as to Counts I–III, which challenged the imposition of the
charge, finding they were barred by the TIA. The court did not immediately dismiss Count
IV because the TIA only pertains to the “assessment, levy or collection” of state taxes, and
Count IV concerned a free speech challenge to the pass-through provision. Maryland
argues, however, that Count IV is also barred by the TIA since the constitutional attack on
the pass-through provision “is subsidiary to, intertwined with, and entirely contingent upon
plaintiffs’ challenge to the tax itself.” Resp. Br. 31.
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The district court ordered further supplemental briefing and held hearings related to
Count IV. After the supplemental briefing but before the final hearing, a Maryland trial
court (the Circuit Court for Anne Arundel County) declared the Act unconstitutional in a
separate challenge brought by subsidiaries of Comcast and Verizon, though it did not
address the pass-through provision specifically. The district court declared Count IV moot
because “the intervening decision by the [Maryland] circuit court has vitiated Plaintiffs’
‘present need for . . . relief from the federal courts.’” J.A. 434 (quoting S-1 v. Spangler,
832 F.2d 294, 297 (4th Cir. 1987)). In its final judgment, the court summarized that it
dismissed Counts I–III “with prejudice for lack of subject matter jurisdiction” and Count
IV “without prejudice for lack of subject matter jurisdiction.” J.A. 438 (emphasis added).
It did not explain why it entered the dismissal of Counts I–III with prejudice.
Plaintiffs appealed to this Court. After full briefing and while this appeal was
pending, the Maryland Supreme Court issued a decision vacating the state trial court’s
declaratory judgment. The Maryland high court held that the lower court had no
jurisdiction to entertain Comcast and Verizon’s declaratory judgment action because the
companies had failed to exhaust administrative remedies. Appellants argue that the ruling
confirms this case is not moot and “highlights the need for expeditious resolution of the
First Amendment issue” due to the present lack of declaratory relief. Appellants’ Suppl.
Authorities Letter 1, ECF No. 50. Maryland counters that the decision has no direct impact
on this appeal because, in its view, Count IV was both barred by the TIA and prudentially
moot. Appellee’s Suppl. Authorities Resp. Letter 1–2, ECF No. 51.
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II.
We begin with the dismissal of Counts I–III for lack of subject matter jurisdiction
on TIA grounds. We review the dismissal de novo. See GenOn Mid-Atlantic v.
Montgomery County, 650 F.3d 1021, 1023 (4th Cir. 2011). We hold that Counts I–III were
correctly dismissed as barred by the TIA, but the dismissal should have been entered
“without prejudice” since it was based on a jurisdictional defect.
The TIA provides that “district courts shall not enjoin, suspend or restrain the
assessment, levy or collection of any tax under State law where a plain, speedy and efficient
remedy may be had in the courts of such State.” 28 U.S.C. § 1341. The Act applies to
claims for both declaratory and injunctive relief. California v. Grace Brethren Church,
457 U.S. 393, 408 (1982). Just because state lawmakers call something a “tax” does not
mean that it falls under the TIA’s ambit necessarily. The TIA does not prevent federal
courts from considering, for instance, a challenge to a purported state “tax” that is in reality
a punitive fee. GenOn, 650 F.3d at 1023.
When determining whether a particular charge is a “fee” or a “tax” for purposes of
the TIA, “we do not focus on the superficial ‘nomenclature provided to the charge at
issue.’” Id. (quoting Valero Terrestrial Corp. v. Caffrey, 205 F.3d 130, 134 (4th Cir.
2000)). Instead, we ask whether the charge is levied primarily “for revenue raising
purposes, making it a ‘tax,’” or “for regulatory or punitive purposes, making it a ‘fee.’”
Valero, 205 F.3d at 134. This Court considers three factors in making that determination:
“(1) what entity imposes the charge; (2) what population is subject to the charge; and (3)
what purposes are served by the use of the monies obtained by the charge.” Id.
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Maryland argues that this three-part test established in Valero conflicts with recent
Supreme Court cases but asserts, in the alternative, that the Act satisfies Valero if the test
remains good law. In the state’s view, rather than the three-part test from Valero, a charge
may only be considered a penalty, and thus falls outside the TIA, if one of two conditions
is met: either (1) Congress has described the imposition as a “penalty” and not a “tax” or
(2) the charge is imposed as a sanction for “the violation of another law that independently
prohibits or commands an action.” Resp. Br. 15 (quoting N.F.I.B. v. Sebelius, 567 U.S.
519, 564 (2012) and CIC Servs., LLC v. I.R.S., 141 S. Ct. 1582 (2021)).
Maryland is mistaken. To start, none of the cases it cites involved the tax-versus-
fee distinction under the TIA. CIC Services, for instance, concerned the Anti-Injunction
Act (“AIA”). The AIA, like the TIA, bars suits for “the purpose of restraining the
assessment or collection of any tax” but, unlike the TIA, applies to federal taxes. 26 U.S.C.
§ 7421(a). The Supreme Court explained that the AIA “draws no distinction between
regulatory and revenue-raising tax rules” and simply “applies whenever a suit calls for
enjoining the IRS’s assessment and collection of taxes—of whatever kind.” CIC Services,
141 S. Ct. at 1594. That statement, according to Maryland, is “incompatible” with Valero
and other Fourth Circuit cases that emphasize the revenue-raising versus regulatory
purpose distinction in deciding whether a charge falls outside the TIA. Valero, for instance,
explained: “[T]he general inquiry is to assess whether the charge is for revenue raising
purposes, making it a ‘tax,’ or for regulatory or punitive purposes, making it a ‘fee.’” 205
F.3d at 134.
It is true that some of Valero’s and GenOn’s language concerning the third factor—
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whether the purpose of a charge is to raise revenue versus regulate conduct—has less force
today. 3 But the multifactor test described in Valero and GenOn has not been abrogated
wholesale. That is so for at least two reasons. First, the cases that collapsed the revenue-
versus-regulatory distinction concerned other statutes, not the TIA. The Supreme Court
“does not normally overturn, or so dramatically limit, earlier authority sub silentio.”
Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 18 (2000); see also Rodriguez
de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484 (1989). Second, the difference
between the TIA and AIA matters. Although the two statutes are very similar, the AIA
pertains to federal taxes, while the TIA pertains to state taxes. See Direct Marketing Ass’n
v. Brohl, 575 U.S. 1, 8 (2015). When Congress uses the term “tax,” courts interpret that to
mean a congressional intent to bar review under the AIA; when Congress states something
as a “fee” or “penalty,” that indicates an intent to permit pre-enforcement judicial review.
N.F.I.B., 567 U.S. at 544. There is no similar line of cases holding that terms and labels
used by state legislatures should be given the same kind of interpretive force under the
TIA.
Thus, the three-factor framework of Valero remains good law. Again, using that
framework, we consider: “(1) what entity imposes the charge; (2) what population is
subject to the charge; and (3) what purposes are served by the use of the monies obtained
by the charge.” Valero, 205 F.3d at 134. A charge is more likely a fee than a tax when an
3 See, e.g., N.F.I.B., 567 U.S. at 567 (“Every tax is in some measure regulatory.”); id. at 573 (“[M]ore recently we have declined to closely examine the regulatory motive or effect of revenue-raising measures.”). 9 USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 10 of 16
administrative agency imposes the charge, when a very small population of regulated
persons or entities is subject to the charge, and when it is placed in a “special fund to defray
the agency’s regulation-related expenses.” Id. The test as applied here confirms that the
Act imposes a tax and not a punitive fee.
First, the entity that imposed the charge was the Maryland General Assembly, not a
regulatory agency. The state’s Comptroller, as assessor and collector of taxes, administers
collection of the money. Collins Holding Corp. v. Jasper County, 123 F.3d 797, 800 (4th
Cir. 1997) (charge more likely to be tax when imposed directly by legislature and
administered by general tax assessor).
Second, while the population subject to the charge is certainly not universal—the
precise number is unclear from the record—the Chamber of Commerce averred in its
amended complaint that “[m]any” of its members would be liable to pay the tax. J.A. 16.
In GenOn, this second factor mattered because only a single entity had to pay the exaction.
650 F.3d at 1024. But the tax here more closely resembles that of Club Association v.
Wise, 293 F.3d 723, 726 (4th Cir. 2002) (per curiam), when West Virginia imposed a tax
on those seeking a license to operate a gambling machine. The TIA barred the federal suit
challenging the West Virginia Limited Video Lottery Act even though the population
subject to the charge was relatively small. Because the Act here subjects “many”
companies to the charge, this factor too supports viewing it as a tax rather than a fee.
Third and finally, the purpose and use of the monies collected will go to educational
improvements as part of the “Blueprint for Maryland’s Future.” True, that is not a mere
siphoning into the state’s general fund, but the revenue will benefit the population at large
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by giving every public school district in Maryland additional funding. This satisfies the
third and “most important” factor since the money will not be spent to “defray” an
“agency’s regulation-related expenses.” Valero, 205 F.3d at 134; see also id. at 135
(“Moreover, the fact that revenue is placed in a special fund is not enough reason on its
own to warrant characterizing a charge as a ‘fee.’”).
Although the district court properly dismissed Counts I–III as prohibited by the TIA,
it erred in entering the judgment of dismissal “with prejudice.” Because the TIA bar
constituted a jurisdictional defect, the dismissal should have been “without prejudice” so
that the Plaintiffs could challenge the tax in the appropriate forum (the state’s
administrative agencies and courts). See S. Walk at Broadlands Homeowner’s Ass’n v.
OpenBand at Broadlands, LLC, 713 F.3d 175, 185 (4th Cir. 2013) (explaining that
dismissals for any defect in subject matter jurisdiction must be without prejudice “because
a court that lacks jurisdiction has no power to adjudicate and dispose of a claim on the
merits”). On remand, the district court should correct the entry of judgment to be a
dismissal of Counts I–III without prejudice.
III.
We now turn to Count IV, which attacks the pass-through provision on free speech
grounds. As an initial matter, Maryland argues that the TIA also bars Count IV and that
the district court erred in concluding otherwise. Maryland contends that Count IV’s
challenge to the pass-through provision is “subsidiary to, intertwined with, and entirely
contingent upon” Appellants’ challenge to the tax itself. Resp. Br. 31. We disagree. The
pass-through provision merely targets the manner and means by which the taxed companies
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pay for the tax. As explained below, whether that targeted activity is best understood as
speech or conduct should be considered by the district court in the first instance. But
regardless of how the provision is conceived, it has no bearing on the validity of the
underlying tax. See BellSouth Telecomms., Inc. v. Farris, 542 F.3d 499, 501–03 (6th Cir.
2008) (holding that TIA did not bar challenge to Kentucky pass-through provision that
prohibited taxed companies from “collect[ing] the tax directly” from consumers and from
“separately stat[ing] the tax on the bill”). If a court were to side with Appellants and declare
the pass-through provision unlawful, that judgment would have no effect on the
“assessment, levy or collection” of the tax. The district court correctly concluded the TIA
presented no bar to Count IV.
The district court allowed the challenge in Count IV to proceed but later dismissed
it as moot after the state trial court declared the Act unconstitutional. The parties disagree
as to whether the dismissal of Count IV should be reviewed de novo or for abuse of
discretion. Appellants say it should be reviewed de novo as a question of law since
mootness, like the TIA, implicates a federal court’s subject matter jurisdiction. Maryland
contends it should be reviewed for abuse of discretion since the court made a “prudential
mootness” ruling by declining to exercise jurisdiction with respect to a claim for
declaratory and injunctive relief while a parallel action was pending in state court. 4 The
4 Prudential mootness “is a matter of discretion, focusing on injunctive and declaratory relief” and asks whether there is “an adequate basis for injunctive relief, a purpose to be served by a specific remedy.” 13B Wright & Miller, Federal Practice and Procedure § 3533.1 n.33 (3d ed. 2022). A decision on prudential mootness is reviewed for abuse of discretion. Id. 12 USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 13 of 16
district court did not specify whether its mootness ruling was based on constitutional or
prudential grounds, and it used both to support its reasoning. But because the district
court’s final judgment entered the dismissal of Count IV “without prejudice for lack of
subject matter jurisdiction,” J.A. 438, we review the dismissal de novo. See Porter v.
Clarke, 852 F.3d 358, 363 (4th Cir. 2017).
Count IV alleges that the pass-through provision violates the First Amendment as a
regulation of political speech or as an improper restriction on commercial speech. To reach
this conclusion, Appellants first note that the parties jointly stipulated that the law “does
not prohibit” taxpayers from “indirectly passing on the cost of the tax . . . by factoring such
cost into its customer pricing.” J.A. 178. The stipulation continued: “The cost of the tax
is passed on directly,” and therefore violates § 7.5-102(c), “only when it is imposed on the
customer by means of a ‘separate fee, surcharge, or line-item.’” J.A. 178. Appellants argue
that companies may thus charge their customers more to account for the increased tax
burden but may not explain to their customers why their bills have suddenly increased by
using a line-item notation. Maryland counters with a host of arguments that the Act
regulates conduct, not speech. 5
The state court decision on which the district court found Count IV moot did not
address the pass-through provision. The Maryland trial court instead held that the Act
violates the Supremacy Clause, Internet Tax Freedom Act, dormant Commerce Clause, and
5 Counsel for Maryland seemed to renege, in part, on the stipulation at oral argument. See 31:10–37:25. This confusion weighs in favor of a remand for further consideration by the district court. 13 USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 14 of 16
First Amendment. 6 Comcast of Calif., LLC v. Comptroller of the Treasury of Maryland,
No. C-02-CV-21-000509, 2022 WL 20359237 (Md. Cir. Ct. Nov. 17, 2022). But because
the state trial court declared the entire Act unlawful, the pass-through provision had no
force. The district court reasoned that, without a tax to impose, Plaintiffs had no ability or
need “to pass through this tax to their customers, either directly or indirectly.” J.A. 434–
35. Therefore, the district court concluded, any decision on the constitutionality of the
pass-through provision at that juncture “would have no practical effect” and “would also
amount to an advisory opinion.” J.A. 435.
While this appeal was pending, the Maryland Supreme Court reversed the lower
state court declaratory judgment. Comptroller of Md. v. Comcast of Cal., 297 A.3d 1211,
1228 (Md. 2023). The state high court’s decision was not based on the merits but instead
a jurisdictional defect. The plaintiffs in that case, the Verizon and Comcast subsidiaries,
failed to pursue any administrative remedies before bringing their complaint for declaratory
relief in state court. 7
6 The First Amendment issue in the state case did not pertain to the pass-through provision and instead alleged generally that the law singles out particular speakers for differential taxation. 7 The Maryland Supreme Court explained that the General Assembly created an “exclusive” scheme of administrative remedies by which aggrieved taxpayers may pursue relief pre- or post-deprivation by first filing a claim with the Comptroller and then seeking review in the Maryland Tax Court, which is an adjudicatory administrative agency in the executive branch of state government and not part of the state judiciary. Comcast, 297 A.3d at 1219. After receiving a final order from the Tax Court, then and only then may the taxpayer seek judicial review. The state trial court’s declaratory judgment was therefore vacated for lack of jurisdiction. 14 USCA4 Appeal: 22-2275 Doc: 54 Filed: 01/10/2024 Pg: 15 of 16
The district court dismissed Count IV as moot after the state trial court issued its
declaratory judgment but before the Maryland Supreme Court vacated the judgment. The
declaratory judgment, however, did not necessarily moot this case because there was an
impending appeal which could (and ultimately did) vacate the judgment, making the
federal case live again. See 13B Wright & Miller, Federal Practice and Procedure
§ 3533.2.1 (3d ed. 2022) (“Action by another tribunal in related proceedings does not
always moot a pending action. . . . Mootness may be denied because the decision is subject
to reopening or appeal . . . .”). The district court erred in dismissing Count IV as moot and,
regardless, Count IV is unquestionably live now that the Maryland Supreme Court has
vacated the judgment that had declared the Act unconstitutional.
Appellants insist that we should resolve Count IV on the merits as it presents “an
urgent and purely legal issue.” Opening Br. 23. We disagree. The district court in the first
instance should decide whether the pass-through provision restrains speech and, if so,
whether it passes constitutional muster. Because a facial challenge requires proving that
“no set of circumstances exists under which the Act would be valid,” United States v.
Miselis, 972 F.3d 518, 530 (4th Cir. 2020), those sorts of circumstances are best considered
by the district court with the benefit of further fact-finding potentially. See, e.g., GenOn,
650 F.3d at 1026 (remanding case and not resolving merits after finding TIA was no bar to
district court’s jurisdiction); Freed v. Thomas, 976 F.3d 729, 732 (6th Cir. 2020)
(remanding for consideration of merits after holding that TIA and comity did not bar
lawsuit alleging unconstitutional taking under Fifth Amendment). A facial challenge to a
statute’s constitutionality presents a “high bar[],” and “courts must typically take care ‘not
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to . . . speculate about hypothetical or imaginary cases.’” Miselis, 972 F.3d at 530 (quoting
Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442, 450 (2008)). The
district court on remand can determine whether the Act is unconstitutional in all
circumstances.
IV.
For the foregoing reasons, we AFFIRM in part, VACATE in part, and REMAND.
The case is remanded with instructions (1) to enter the dismissal of Counts I–III “without
prejudice” and (2) to consider the merits of Count IV’s First Amendment challenge.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED WITH INSTRUCTIONS