The Federal Court of Appeal has ruled that a $25 levy on iPods and all other MP3 players must be dropped.
The surcharge was imposed by the Copyright Board of Canada last December as a means of protecting artists hurt by illegal downloading.
It was quashed after an appeal was launched by several major retailers, including Future Shop and Wal-Mart.
They argued that the levy was "unconstitutional and invalid" because it amounted to a tax on digital-music players, and only Parliament has the right under the Constitution Act to impose taxes.
The court declined to extend its decision to blank recording media, such as cassettes and recordable CDs, so the levy on those items will remain in place.
"The issue has to do with what kind of media the levy's attached to," Michael Geist, an expert in internet law at the University of Ottawa, told the Canadian Press.
"It overturned the applications of the levy on iPods and upheld the constitutionality of the system itself."
Many observers expect that the issue will eventually be appealed to the Supreme Court of Canada.