Gov. Gretchen Whitmer earlier this year proposed a 4.7% tax on sales of digital advertising on online platforms such as Google, Facebook, TikTok, and Amazon. Both Utah and Illinois adopted similar taxes in 2026. Twelve states have enacted taxes on digital goods and services in 2026 alone, and 10 more state legislatures are considering new digital taxes.

A recent court ruling should force Michigan and other states to reconsider. The Maryland Tax Court held that digital advertising taxes raise serious constitutional issues. Maryland in 2022 adopted the first digital advertising tax in the country, which was challenged by Apple, Google, and streaming service Peacock TV.

The Maryland tax applied to online advertising, but not to print or broadcast advertising. The Tax Court ruled that singling out online advertising while excluding traditional advertising put the Maryland tax in conflict with the 1998 Internet Tax Freedom Act, which bans state and local governments from taxing internet access and from placing discriminatory taxes on electronic commerce.

The court made this ruling on summary judgment, without sending the case to trial, because it found that the issues were clear on their face without having to take testimony on the impact of the Maryland tax.

Analysis by Maryland’s Free State Foundation shows that the tax law had other potential problems. Beside the conflict with the federal statute, the law also “violated the Constitution’s dormant Commerce Clause and Due Process Clause,” the Free State Foundation writes. “The tax violates the First Amendment by discriminating against digital advertising and exempting print and broadcast ad sales.”

The 2026 version of Whitmer’s digital advertising tax proposal would have placed a 4.7% excise tax on online ad revenues from Michigan viewers. The tax would apply broadly to digital advertising revenues, but not to advertising in other media. It also would create an exception for digital broadcast and news media.

The Michigan Department of Treasury estimated that the proposed tax would generate at least $282 million in revenues, which Whitmer claims would be directed to support the state’s Medicaid program, though it is unclear whether or how the funds would be used that way.

Whitmer had previously proposed a digital advertising tax to help pay for Michigan roads. That proposal, which was introduced in the legislature in 2025 as HB 4142, had additional constitutional problems because the tax rate would vary from 2.5% to 10%, depending on the amount of global sales. As Mackinac Center Director of Fiscal Policy James Hohman pointed out in his analysis last year, it is unlikely that states can increase taxes on companies based on their activity outside of the state.

The tech companies from which Michigan would collect a digital advertising tax are among the biggest companies in the world and mostly located in other states. That makes them tempting targets for new state revenues. But the actual burden of the tax is likely to miss these targets and fall mostly on people and businesses located in Michigan.

Michigan businesses are the most likely buyers of ads that are viewed in Michigan. The tech companies that operate online platforms for Michigan consumers will pass along as much of the tax as they can to advertisers. With the tax, businesses trying to reach Michigan customers must either buy fewer ads or raise the prices on their products to cover the higher cost of online advertising.

Targeting advertising to Michigan consumers helps people browse websites to find the best products and services at the best prices. Imposing a tax specifically on advertising aimed at Michigan residents would disrupt that process. Among those most affected by this disruption would be small businesses in Michigan that rely on targeted online advertising to promote their products and will now have to pay more to cover the cost of the tax.

While the Maryland ruling applies only in Maryland, the ruling and the logic behind it apply to the recent digital advertising tax proposals in Michigan. Maryland had raised more than half a billion dollars from the tax, which it now will have to give back.

Michigan should heed the lesson from the Maryland court. While trying to tax big tech advertising and other services may have popular appeal for elected officials, doing so will only cause problems later, when these taxes are found to violate the U.S. Constitution.

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