California OTA Rejects R&D Credit Maryland Digital Advertising Tax Ruling Raises Questions for Illinois’s New Targeted Advertising Tax

A significant Maryland tax decision may provide an early roadmap for challenges to Illinois’s new targeted advertising tax before the Illinois tax even takes effect.

On August 14, 2026, the Maryland Tax Court issued companion decisions in Apple Inc. v. Comptroller of Maryland, Google LLC v. Comptroller of Maryland, and Peacock TV, LLC v. Comptroller of Maryland, invalidating Maryland’s Digital Advertising Gross Revenues Tax.

The court concluded that Maryland’s tax violated the federal Internet Tax Freedom Act (“ITFA”), the dormant Commerce Clause, and the Due Process Clause. In the Peacock TV case, the court also found a First Amendment problem associated with Maryland’s exemption for certain broadcast and news media entities. The court reversed the Comptroller’s denial of the taxpayers’ 2022 refund claims and ordered refunds with interest.

The decisions are particularly timely for Illinois.

Illinois recently enacted the Targeted Advertising Services Tax Act, which imposes a 10% tax beginning January 1, 2027 on gross receipts from qualifying targeted advertising services provided in Illinois. The Illinois law generally applies when a provider’s annual cumulative Illinois gross receipts from targeted advertising services exceed $1 million during the preceding 12-month period.

Maryland’s decisions do not determine whether the Illinois tax is valid. The two statutes contain important differences. But some of the Maryland Tax Court’s reasoning—particularly under ITFA—could become relevant if Illinois’s tax is challenged.

What Was Maryland’s Digital Advertising Tax?

Maryland became the first state to impose a tax specifically directed at digital advertising revenues. Its Digital Advertising Gross Revenues Tax generally applied to taxpayers with at least $100 million in global annual gross revenues and at least $1 million of annual gross revenues attributable to digital advertising services in Maryland. The tax rate ranged from 2.5% to 10%, with the applicable rate determined by the taxpayer’s global annual gross revenues, rather than solely its Maryland receipts.

The taxpayers challenging the law paid the tax for 2022 and subsequently sought refunds. After the Maryland Comptroller denied those claims, the disputes ultimately reached the Maryland Tax Court. The court’s August 14 decisions addressed the merits of the tax rather than merely procedural challenges to its implementation.

The Internet Tax Freedom Act Was Central to the Decision

Perhaps the most important part of the Maryland decisions for other states involves the federal Internet Tax Freedom Act. ITFA generally prohibits state and local governments from imposing certain discriminatory taxes on electronic commerce.

The Maryland Tax Court concluded that digital advertising and nondigital advertising were sufficiently similar for ITFA purposes. Because Maryland imposed its special gross-receipts tax on digital advertising without imposing a comparable tax on traditional advertising, the court found unlawful discrimination against electronic commerce.

That reasoning could have consequences beyond Maryland.

States increasingly want to tax economic activity associated with digital platforms, data, online advertising, streaming, software, and other electronic services. ITFA may limit the ability of states to impose materially different tax treatment solely because a transaction occurs through an electronic medium.

For Illinois, that question may become particularly important because the new tax specifically targets certain advertising delivered through digital technology.

Illinois’s New Targeted Advertising Tax

Illinois enacted its Targeted Advertising Services Tax Act in June 2026. Beginning January 1, 2027, Illinois will impose a tax equal to 10% of gross receipts derived from targeted advertising services provided in Illinois. The statute defines a provider generally as a person engaged in providing targeted advertising services whose cumulative gross receipts from those services in Illinois during the previous 12 months exceed $1 million. Providers must test that threshold quarterly. Once the threshold is met, the provider generally becomes subject to the tax and filing obligations for the following one-year period. Controlled-group members are treated as a single entity for purposes of determining whether the threshold has been met.

The statute also requires covered providers to register with the Illinois Department of Revenue. Illinois law states that it will be unlawful to engage in business as a covered provider on or after January 1, 2027 without the required registration.

What Is “Targeted Advertising” Under the Illinois Law?

Illinois did not simply impose a general tax on all advertising delivered through the internet. The statute focuses on targeted advertising services, generally involving advertisements selected or delivered based on information associated with the particular user who receives the advertisement. Relevant information can include browsing history, search behavior, shopping and purchase history, biographical information, and other user-consumer data.

That distinction could become important if Illinois faces an ITFA challenge. The state may argue that it is taxing a distinct advertising service based upon collection, analysis, and use of consumer data rather than merely imposing a tax on traditional advertising because it happens to be delivered electronically. Taxpayers may respond that targeted digital advertising remains economically comparable to nontaxable traditional advertising and therefore receives discriminatory treatment solely because of the technology used to deliver or select the advertisements.

The Maryland Tax Court’s analysis gives that argument considerably more significance.

Illinois Is Not Maryland

Despite the obvious similarities, taxpayers should not assume that Maryland’s decision automatically invalidates the Illinois tax.

There are meaningful structural differences between the two statutes. One of the Maryland Tax Court’s major constitutional concerns involved Maryland’s use of a taxpayer’s worldwide revenues to determine the applicable tax rate. Maryland imposed graduated rates ranging from 2.5% through 10%, with the taxpayer’s global annual gross revenue determining which rate applied. The Maryland Tax Court concluded that the structure created problems under the dormant Commerce Clause, including fair-apportionment and discrimination concerns.

Illinois does not appear to use the same graduated global-revenue structure. Instead, Illinois imposes a flat 10% rate on taxable Illinois targeted-advertising gross receipts once the taxpayer meets the statutory threshold.

That difference could allow Illinois to defend against at least some of the Commerce Clause arguments that succeeded in Maryland.

Illinois Also Uses a User-Location Sourcing Rule

Illinois’s statute provides that targeted advertising services are considered provided in Illinois when the user-consumer receiving the targeted advertisement is located in Illinois. The statute includes rules governing how providers determine that location and permits reasonable categorization standards in analyzing user-consumer data, although reliance on those standards does not eliminate the taxpayer’s burden of proof.

This could produce its own controversy. Digital advertising platforms may process enormous volumes of transactions involving users accessing services from mobile devices, traveling between jurisdictions, using privacy tools, declining location permissions, or generating conflicting location indicators. Determining exactly which advertising receipts are attributable to Illinois may therefore become both a legal and evidentiary problem.

Even if the underlying tax survives a constitutional challenge, sourcing disputes could become a significant area of Illinois audit controversy.

Could Illinois Face an ITFA Challenge?

The Maryland decisions make that possibility difficult to ignore.

Illinois’s statute imposes a tax specifically on targeted advertising services. Traditional advertising services that do not fall within the statutory definition are not generally subject to the same new 10% tax.

That creates an obvious question under ITFA:

Is Illinois taxing electronic commerce differently from a similar transaction occurring through a nondigital medium?

The Maryland Tax Court answered a comparable question in favor of the taxpayers. It found that digital and nondigital advertising were sufficiently similar that imposing a tax only on digital advertising violated ITFA’s prohibition against discriminatory taxation of electronic commerce. Illinois could attempt to distinguish its law by emphasizing that its tax is directed specifically at data-driven targeted advertising rather than digital advertising generally.

Whether that distinction is legally sufficient has not been decided.

The Maryland opinions therefore provide persuasive arguments but not a predetermined result.

The News-Media Exemption Could Present Another Issue

Illinois’s statute excludes certain advertising services involving digital interfaces owned or operated by or on behalf of a news media entity. That provision deserves attention in light of Peacock TV.

In that case, the Maryland Tax Court separately concluded that Maryland’s broadcast and news-media exemption raised First Amendment concerns because application of the exemption required distinctions involving protected press activities. Illinois’s exemption is not necessarily identical to Maryland’s.

Nevertheless, where tax liability depends on whether a taxpayer qualifies as a news-media entity—or potentially on the character of the content being produced—the Maryland decision provides another potential line of constitutional analysis.

This is an area businesses and advisers should monitor as Illinois develops regulations and administrative guidance.

Illinois Businesses Should Not Assume Litigation Will Eliminate Their Compliance Obligations

The existence of potential constitutional challenges does not eliminate the January 1, 2027 effective date. Unless the Illinois statute is repealed, enjoined, invalidated, or otherwise modified, businesses falling within the statutory requirements will need to evaluate registration, return filing, sourcing, and payment obligations. That is particularly important because the law requires covered providers to register before engaging in the covered business activity beginning January 1, 2027.

Businesses should therefore avoid simply assuming that Maryland’s decision means Illinois’s statute will never become operative. Tax litigation can take years. During that period, taxpayers frequently must decide whether to pay the tax and pursue refunds, challenge an assessment, seek injunctive or declaratory relief where procedurally available, or otherwise preserve their rights while complying with applicable procedural rules.

Those decisions should generally be made before filing deadlines begin to expire.

Refund and Protective-Claim Strategy Could Become Important

Maryland illustrates another procedural point that may eventually become important in Illinois. Apple, Google, and Peacock pursued their claims through the refund process. After paying the Maryland tax and having their refund requests denied, they challenged those determinations before the Maryland Tax Court.

Ultimately, the court reversed the refund denials and ordered the tax returned with interest. If litigation develops over Illinois’s targeted advertising tax, businesses paying substantial amounts of tax may need to consider whether refund or protective-refund claims should be filed to prevent statutes of limitation from expiring while another taxpayer’s challenge proceeds.

A favorable court decision involving one taxpayer does not necessarily preserve the refund rights of every other taxpayer. Statutes of limitation can continue running while test cases are litigated. Businesses with material exposure should therefore pay close attention not only to the substantive constitutional issues but also to Illinois refund procedures and limitation periods.

Illinois Already Has a Bill Seeking Repeal of the Tax

The Illinois tax is also facing legislative opposition before its effective date. On August 5, 2026, House Bill 5807 was introduced in the Illinois General Assembly. The bill would repeal the Targeted Advertising Services Tax Act and make related conforming changes. As of its introduction, however, the repeal proposal had not eliminated the enacted tax.

Businesses should therefore monitor both tracks: the potential for litigation challenging the tax and the possibility that the General Assembly modifies or repeals the law before January 1, 2027.

Until one of those events occurs, businesses should plan on the basis of the law currently enacted.

Businesses Should Begin Identifying Potential Exposure Now

Companies involved in digital advertising should not wait until the first Illinois return is due to determine whether the new law applies.

A preliminary review should consider:

• whether the company provides services that fall within Illinois’s definition of targeted advertising;

• the amount of Illinois targeted-advertising gross receipts during the preceding 12 months;

• whether controlled-group aggregation causes the $1 million threshold to be exceeded;

• how the company determines the location of individual users;

• whether systems can reliably identify Illinois-attributable advertising receipts;

• whether any statutory exclusions apply;

• whether contracts allow the economic cost of the tax to be passed to advertisers;

• registration and return-filing requirements;

• documentation needed to substantiate sourcing; and

• whether constitutional or federal statutory challenges could support a refund or protective-claim position.

Companies operating nationally should also consider the Illinois tax as part of a broader multistate digital-tax review rather than treating it as an isolated compliance requirement.

The Broader Issue: States Are Searching for New Ways to Tax the Digital Economy

The Maryland litigation and Illinois legislation reflect a larger trend in state taxation. Traditional sales-tax systems developed around transactions involving tangible property. Modern digital businesses frequently generate revenue through advertising, consumer data, platform access, SaaS, streaming, digital assets, online marketplaces, and other activities that do not fit neatly within those historical tax bases.

States are responding with new taxes. Those efforts, however, remain subject to federal statutory restrictions and constitutional limitations. ITFA may restrict discriminatory taxation of electronic commerce. The Commerce Clause limits taxes that discriminate against or improperly burden interstate commerce and requires appropriate apportionment. Due Process imposes independent jurisdictional constraints. And exemptions based on the identity or activity of news organizations or other speakers can potentially implicate the First Amendment.

Maryland’s first-in-the-nation digital advertising tax has now encountered several of those limitations. Illinois may be the next major testing ground.

What the Maryland Decisions Mean for Illinois

The Maryland Tax Court decisions do not establish that Illinois’s Targeted Advertising Services Tax Act is unconstitutional. But they substantially increase the importance of analyzing that question.

Maryland demonstrates that courts may look beyond a state’s characterization of a digital tax and examine whether electronically delivered services are being taxed differently from comparable nondigital activity. At the same time, Illinois’s flat tax rate, different threshold structure, user-location sourcing methodology, and narrower focus on targeted advertising create distinctions that could matter in future litigation.

For taxpayers, the practical approach is therefore twofold. Businesses potentially subject to the tax should prepare for the law to become effective on January 1, 2027. At the same time, taxpayers paying material amounts should closely monitor constitutional litigation, federal ITFA developments, Illinois Department of Revenue guidance, legislative repeal efforts, and applicable refund statutes of limitation.

In emerging areas of state taxation, compliance and controversy planning often need to occur simultaneously.

Disclaimer

This article is provided for general informational purposes only and does not constitute legal, tax, accounting, or other professional advice. The Maryland Tax Court decisions discussed above may be subject to further judicial review, and Illinois’s Targeted Advertising Services Tax Act does not become effective until January 1, 2027 and may be affected by subsequent legislation, regulations, administrative guidance, or litigation. The application and constitutionality of digital and targeted-advertising taxes depend on the particular statutory structure, taxpayer, transactions, procedural posture, and applicable law. Businesses should consult qualified legal and tax advisers regarding their particular circumstances.