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

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,

(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,

(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.”

. The Act applies to

claims for both declaratory and injunctive relief. California v. Grace Brethren Church,

(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,

.

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.’”

(quoting Valero Terrestrial Corp. v. Caffrey,

(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,

. 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.”

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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,

(2012) and CIC Servs., LLC v. I.R.S.,

(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.

(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.’”

.

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.,

(2000); see also Rodriguez

de Quijas v. Shearson/Am. Express, Inc.,

(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,

, 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.,

. 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,

. A charge is more likely a fee than a tax when an

3 See, e.g., N.F.I.B.,

(“Every tax is in some measure regulatory.”);

(“[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.”

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,

(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.

. But the tax here more closely resembles that of Club Association v.

Wise,

(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,

; see also

(“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,

(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,

, 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,

(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,

(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.,

(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,

. 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,

(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,

(remanding case and not resolving merits after finding TIA was no bar to

district court’s jurisdiction); Freed v. Thomas,

(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,

(quoting

Wash. State Grange v. Wash. State Republican Party,

(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

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